Hi guys
I am currently writing up economic notes for trials, but I cant seem to understand the following causes of inflation:
Demand inflation
Cost inflation
Imported inflation
Inflationary Expectations
Could someone please help me explain it?
Any help is good help
Thanks
Okay so to begin,
inflation refers to the general rise in prices -> I.e. an increase in the cost of living...
Keep in mind that inflation is often a combination of the four causes you mentioned (so don't think of them separately so much as issues that can occur concurrently in an economy):
Demand pull inflation: Excess aggregate demand (I.e. more people want more stuff than an economy can supply) leads to an increase in prices as this is the only way to ration goods & services. In other words, excess demand 'pulls' prices to a higher level to determine 'who gets what'
Cost push inflation: An increase in the costs of production (i.e. a rise in any of the factors of production -> labour, raw materials etc) forces firms to 'push' prices higher -> For instance, if wages increase labour costs are now HIGHER, forcing firms to PUSH up prices to maintain profit margins
Imported inflation: If overseas inflation levels increase as a result of any of the above factors, the price of imports will rise, also inflating the domestic economy: I.e, cost push inflation in China may force firms to increase the price of manufactured goods, effecting not only the Chinese economy, but also Australian consumers & firms
-> X Australian business now has to pay MORE for Chinese products
Inflationary expectations: If people THINK prices are going to rise they are going to purchase goods & services whilst they are less expensive, leading to demand inflation and ultimately higher prices -> Similarly, an expectation that prices are going to DROP will encourage people to save more and spend once goods & services are cheaper
obviously these are simplistic explanations and just make sure that in your notes you include much more detail as well as diagrams/ further explanation to show markers you are an economic animal
