Different Types of inflation.pptx

managerial economics inflation

1. DIFFERENT TYPES OF INFLATION

2. INDEX 2 Introduction Definition Different types of inflation on different basis Demand pull inflation Meaning Causes Effects Cost push inflation Meaning Causes Effects Markup inflation Conclusion

3. INTRODUCTION Unlimited human wants is one of the basic economic problems. Humans always want a big and diversified set of products as well as a host of services for living a comfortable life. Inflation aims to measure the overall impact of price changes for a diversified set of products and services and allows for a single value representation of the increase in the price level of goods and services in an economy over a period of time. 3

4. DEFINI T ION 4 Crowther- Inflation is a state in which value of money is falling and prices are rising. ACI Day- Inflation consists of a process of rising prices. Paul A Samuelson- Inflation is a time of generally rise in prices for goods and factors of production.

5. DIFFERENT TYPES OF INFLATION 5 On the basis of degree of control Open inflation Suppressed inflation On the basis of rate of employment Partial inflation Full inflation On the basis of rate of employment Creeping inflation Walking inflation Galloping inflation Hyper-inflation

6. Some other inflation 6 Stagflation Core inflation Asset inflation Types of inflation on the basis of causes Demand pull inflation Cost push inflation Markup inflation

7. DEMAND PULL INFLATION 7 Demand pull inflation is set in motion when consumer demand increases. when the aggregate demand for goods and services is higher than aggregate supply, sellers will raise prices as a result. This price hike is called demand pull inflation. Demand pull inflation is one of the most common causes of inflation in the economy.

8. CAUSES OF DEMAND PULL INFLATION Increase in consumer expenditure. Increase in money supply and bank credit i.e. Money supply expansion. Increase in public expenditure i.e. Government spending. Reduction in taxes. Inflation expectation. Strong branding. Growing economy. Increase in population. Increase in foreign demand for domestic goods. 8

9. DEMAND PULL INFLATION USING AS-AD DIAGRAM 9

10. EFFECTS OF DEMAND PULL INFLATION Demand pull inflation creates imbalance in the usual relationship between supply and demand because production cannot keep up with consumer demand for any of the reasons outlined above higher prices are the ultimate result. Some other effects are:- Produces purchasing power of consumers. Increases the cost of borrowing. Potential impact on currency rates. Continued inflation growth. Encourages spending to avoid impact of further inflation. 10

11. COST PUSH INFLATION 11 Cost push inflation occurs when overall prices increase due to increase in the cost of factors of production. Higher cost of production can decrease the aggregate supply in the economy. Since the demand for goods has not changed, the price increases from production are passed on to consumers creating cost push inflation.

12. CAUSES OF COST PUSH INFLATION Increase in labour cost. Increase in interest rate. Increase in rent. Increase in profit margin. Increase in raw material. Reduction in subsidies. Increase in indirect taxes. Natural disasters. Devaluation of currency. 12

13. COST PUSH INFLATION USING AS-AD DIAGRAM 13

14. EFFECTS OF COST INFLATIONS 14 The inflation caused by cost push inflation is somewhat the wrong kind of inflation. Cost push inflation is characterized by rising prices and falling real GDP. Some other effects are:- Productivity level of the economy deteriorates. Decreases employment. Decline in real GDP. Laying off of workers. Fall in living standards.

15. MARKUP INFLATION 15 The theory of markup inflation is mainly associated with Professor Ackley. Firms fix administrative prices for their goods by adding to their direct material and labour costs and some standard markup which covers profit. labour also seeks wages on the basis of fixed markup over its cost of living. This model of inflation can lead to a stable,a rising or a following price level depending on the mark of switch firms and workers respectively use. Increase in prices to maintain desired markup leads to increase in prices of other firms. When consumers buy such goods, their cost of living rises. This leads in rising of wage costs. According to Ackley, the size of the markup applied by firms and workers is a function of the pressure of demand felt in the economy. To conclude with Ackley, " Inflation might start from an initial autonomous increase either in business and labour markets or it may start from an increase in aggregate demand and which first and most directly affected some of the flexible market determined prices. But however it starts,the process involves the interaction of demand and market elements.

16. CONCLUSION 16 Basically inflation refers to a substantial rise in the prices of the goods and services in the economy. There are various causes due to which inflation occurs in the economy. Due to its occurrence, Inflation has various types on the basis of degree of control, employment, inflation rate and causes. Inflation is controlled by the central bank in the economy through its monetary and fiscal policies which can vary from time to time.

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