Demand pull and cost push inflation

Discussion in 'CT7' started by Jinnentonix, Aug 16, 2017.

  1. Jinnentonix

    Jinnentonix Member

    Dear forum experts

    Just wanted to quickly confirm a few things regarding the order of events with demand-pull and cost push inflation. All I'd like to know is whether this sounds right in terms of explaining these concepts in my own words.

    With demand pull inflation:
    * Aggregate demand increases (i.e. a rightward shift in the AD curve)
    * Firms increase output in response. However, as firms find that they cannot keep up with the demand as they approach maximum capacity utilisation, they also raise prices (i.e. a rightward movement along the AS curve)

    With cost push inflation:
    * Production costs (e.g. wages) increase
    * Firms pass on the costs increase through price increases
    * Aggregate demand decreases (i.e. a leftward shift in the AD curve)
    * Firms decrease output in response (i.e. a leftward shift in the AS curve)

    Appreciate any help!
     
  2. freddie

    freddie Member

    Hi
    You're right about demand-pull inflation, ie AD shifts right and there's a movement along the AS curve. Note that the increase in AD won't cause inflation when there is excess capacity because the AS curve is relatively elastic then; it's only a problem when the economy is at or near full capacity when the AS curve is relatively inelastic. This is why it's associated with a boom.

    With cost-push inflation, costs increase and therefore the AS curve shifts to the left (or upwards by the increase in costs). There is then a movement along the AD curve leftwards as the price level increases and output falls.

    Hope this helps.
     
  3. Jinnentonix

    Jinnentonix Member

    Thanks, this does help a lot!
     

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