Question

v.list the factors that can affect the increase of bread in Accra

vi.identity the key factor that cause cost_push inflation and illustrate the situation with a graph

give an example of ceteris paribus

Answer 1

v. The factors that can affect the increase of bread in Accra are (increase in the supply of bread):

1. Lower cost of production: when the factors of production used are available at a lower cost, production of the good increases and so does the supply.

2. Technological development: If a firm faces technological improvement then its production level increases.

3. Transportation cost: If the transportation cost related to the product decreases, then the cost of the product decreases, and the production increases.

4. The entry of new firms: If there is more entry of firms in the market for the good, then the overall production level increases.

5. Low taxes and increase in government spendings: This gives a boost to the firms to produce more and expand.

vi. Cost-push inflation occurs when the price level of the economy increases due to an increase in the factor prices or cost of production. When this happens, the aggregate supply curve in the economy shifts leftward (decreases), and the average price level rises in the economy

Key factors that cause cost-push inflation:

1. Increase in wages: Increase in wages leads to an increase in the cost of production which further leads to a decrease in the aggregate supply and an increase in the price level.

2. Increase in the price of the factors of production (raw materials used): When the price of the raw materials increases, the cost of production increases, aggregate supply decreases in the economy, and price level increases.

3. Government taxes: Sometimes the government puts taxes on some goods to reduce its production (mainly harmful products). The firm producing the products lowers the production level due to higher taxes. The reduced production level decreases the aggregate supply and increases the prices.

All the above reasons lead to cost-push inflation.

The above diagram represents cost-push inflation. In the AS-AD model, we study the interaction of aggregate supply and aggregate demand to get the real GDP and the price level. Initially, the AD and AS1 curves intersect to achieve the output level Q1 and the price level P1.

Now, due to cost-push inflation, the aggregate supply shifts to the left from AS1 to AS2. The new equilibrium will be at the point where the AD intersects the new supply curve AS2. Here, quantity has reduced from Q1 to Q2 (real GDP decreased) and the price level increased from P1 to P2 which shows the cost-push inflation.