Wednesday, May 4, 2011

Cost-Push Inflation

Cost-push inflation is also known as Cost Inflation. It basically arises due to a rise in wage rates, which in modern economic conditions, are affected somewhat frequently due to pressure from labour unions. Interaction between demand for and supply of labour is no longer the only factor responsible for the determination of wage rates. That way we can say that wages rates these days are somewhat 'administered'.

Normally wage rate should increase only when there is excess demand for labour. Collective bargaining, through labour unions, is often responsible for a hike in wage rate, which has no relationship with the demand for labour exceeding supply. This way when the employers are forced to increase wages, their cost of production also increases. They cannot supply the finished goods at previous prices. Unable to curtail production, for which there may not be any apparent reason, producers and left only with the option of increasing the market price of the commodity.

It is very difficult to control this type of inflation through Fiscal and monetary policies. Through restrictive monetary and fiscal policies the aggregate demand can be brought down, which will bring down the price. But that affects economic growth, as production and investment gets curtailed and unemployment is created. Basically producers' profit is caught between restrictive monetary and fiscal policies on one side, and pressure for higher wages from labour unions on the other. Ultimately an understanding between employers and unions ascertain a stable wage rate that can drive out the inflationary price rise, where unions are faced with further unemployment, and producers are faced with reduced profits, both due to curtailed production.

Mixed Demand-Cost Inflation

Inflation may arise without an increase in general aggregate demand. Under a condition of full-employment, if there is an increase for a particular class of goods in the product or commodity market, it will push up the prices of that class of goods. This will induce producers to produce more of that particular class of goods. So more labourers or workers will be employed at a higher wage rate, as there is no idle labour force in the labour market. This may induce labourers in other industries to go for a wage hike as well, though there is no extra demand for labour in those industries. This way market prices of commodities will eventually go up due to increase in cost of production.

Also read: Inflation and Deflation Demand-Pull Inflation Effects of Inflation

No comments:

Post a Comment

Want to say something? Say it!

Update(s):Post(s) under preparation: -
View Chandra Bhanu's Art at


Related Posts Plugin for WordPress, Blogger...


indifference curve investment demand-pull inflation economy fiscal policy monetary policy cost-push inflation demand demand for money destabilized economy economics stagflation supply of money Opportunity Cost Quantity Theory of Money Theory of Consumption World economy automatic stabilizer capital choice consumption function current accounts deficit deflationary gap demand for investment depression derivation effects of inflation equilibrium fiscal deficit fresh investment growth imbalance inflation interest money perfect competition savings savings function world Accounting Profit Adam Smith Alfred Marshall Diminishing Marginal Utility Economic Profit Equimarginal Utility General Equilibrium Theory IS Curve J. M. Keynes Keynes' Theory of employment LM Curve Lionel Robbins Normal Profit PPC Production Possibility curve Software system development Utility Analysis accelerator account accounting alternative uses autonomous investment balance of payments book keeping capital goods classical theory of the rate of interest commodity consumer consumer goods consumption credit debit definition deflation discretionary double entry economic functions economic wants educated education ends energy ermployment full employment functions of money growth rate habit imitation imperfect competition income income analysis income determination income effect induced investment inflationary gap investment function knowledge labour less than full employment liquidity preference theory long run long run equilibrium means monetary analysis monetary measures monopoly multiplier price price effect price maker production possibility frontier profit maximization propensity revealed preference analysis sacrifice say's Law scarce science shifts of IS LM curves short run short run equilibrium shut down conditions slow down society stagnation student subsidies subsidy substitution effect success sunk capital supply supply of savings technology unproductive wealth world economy 2012