Inflation is the persistent rise in the general level of prices. There are 2 types of infation:
1.Demand Pull inflation- occurs only when total demand for good and service exceed the economy´s capacity to produce those goods. as economy grows we demand more to prices increase (an increase in aggregate demand increases prices)
2. Cost Push inflation- Caused by an increase in the costs of production or in profit levels (a decrease in aggregate supply increases prices) and it's of 3 kinds;
- Wage push, proft push, import push
-Wage push: Wages increases, so its more expenisive to pay workers
Therefore, since it costs more to produce, prices go up
-Profit push: companies want profit so they lower supply so prices can increase
This causes an increase in profit margin, which increases prices
- Import push: increase in oil prices elsewhere- increase cost to businesses- prices increase(i)
(i) Stephanie Powers, Economic Growth lecture notes, slides 17 and 18, April 2012
Inflation is the persistent rise in the general level of prices. There are 2 types of infation:
1.Demand Pull inflation- occurs only when total demand for good and service exceed the economy´s capacity to produce those goods. as economy grows we demand more to prices increase (an increase in aggregate demand increases prices)
2. Cost Push inflation- Caused by an increase in the costs of production or in profit levels (a decrease in aggregate supply increases prices) and it's of 3 kinds;
- Wage push, proft push, import push
-Wage push: Wages increases, so its more expenisive to pay workers
Therefore, since it costs more to produce, prices go up
-Profit push: companies want profit so they lower supply so prices can increase
This causes an increase in profit margin, which increases prices
- Import push: increase in oil prices elsewhere- increase cost to businesses- prices increase(i)
(i) Stephanie Powers, Economic Growth lecture notes, slides 17 and 18, April 2012