Download Inflation - Doral Academy Preparatory

Demand Pull Inflation
Demand Pull Inflation
occurs when Aggregate
demand (C+I+G+(X-M))
increases at a rate faster
than the capacity of the
economy to produce goods
and services ie: AD>AS.
This increase competition
for goods and services
drives up their prices.
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Demand Pull Inflation
Price $
Aggregate Supply
P2
Aggregate Demand 2
P1
Aggregate Demand 1
2
Q1
Q2
Real GDP ($)
Demand Pull Inflation
An increase in demand shifts the
aggregate demand curve to the right,
from AD1 to AD2 pushing up the price
level from P1 to P2.
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Sources of
Demand Pull Inflation
Any increase in Aggregate Demand
(C + I + G + ( X – M ) ) as the economy
approaches full employment.
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Sources of
Demand Pull Inflation
Full employment causes
labour shortages,
employers thus bid up
wages to attract labour.
The increased income,
transpires into
increased consumption
causing Aggregate
Demand to rise.
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Sources of
Demand Pull Inflation
High levels of foreign investment
increases employment, income,
consumptions and ultimately
Aggregate Demand.
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Sources of
Demand Pull Inflation
Growth in foreign
economies can lead to
higher incomes for our
exporters, thus
allowing increases in
Aggregate Demand.
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Sources of
Demand Pull Inflation
Inflationary
expectations – If
members of an
economy expect
prices to rise, it brings
forward expenditure
decisions leading to
demand pull inflation
eg: Pre GST in
Australia.
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Sources of
Demand Pull Inflation
Increasing
consumption due to
changes in
consumption
patterns (less savings
at any level of
income).
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Sources of
Demand Pull Inflation
Monetary consideration – too much credit
in the economy. A relaxed monetary policy
leads to a reduction in interest rates
leading to an increase in Aggregate
Demand and thus prices.
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Cost Push Inflation
 Cost Push Inflation occurs
when prices are pushed up
by rising costs to
producers who compete
with each other for
increasingly scarce
resources. The increased
costs are passed onto
consumers.
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Cost Push Inflation
Price $
Aggregate Supply 2
Aggregate Supply 1
P2
P1
Aggregate Demand
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Q2
Q1
Real GDP ($)
Cost Push Inflation
An increase in the prices of inputs
shifts the aggregate Supply Curve to
the left, from AS1 to AS2 pushing up
the price level from P1 to P2.
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Sources of
Cost Push Inflation
Any input may become a major cost
to business eg: wage increases lead
to higher production costs.
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Sources of
Cost Push Inflation
Labour shortages in some sectors
necessitate wage increases in that
sector, however it has a domino
effect leading to wage rises in other
sectors.
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Sources of
Cost Push Inflation
 NB: Wage rises in excess of
productivity increase leads to
inflationary pressure.
 The extend to which a producer
can pass on price rises depends
on the level of competition in the
industry.
 The more competitive the
industry, the more the producer
has to absorb costs rather than
pass them onto consumers.
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Sources of
Cost Push Inflation
Inflation imported from
abroad, eg: the rise in
the cost of intermediate
goods and resources
imported from other
countries flows through
in the form of higher
prices domestically eg:
oil prices.
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Sources of
Cost Push Inflation
Government budgetary
problems – an increase
in the cost of public
utilities eg: electricity,
water etc, leads to higher
costs to business and
households.
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