Question

Define and explain the concept of Inflation and describe the difference between demand-pull and cost-push inflation

Answer 1

Inflation can be defined as the decrease in the purchasing power of a unit of nations currency . It is also referred as the rise in general price level. The term Inflation can be defined as the rise in the prices of goods and services which are of common use. In other words Inflation can be explained as the phenomenon that  measures the average price change in a basket of commodities and services over time. It is the quantitative measure of the rate at which average level of price of basket consisting of selected goods and services changes. In this way the opposite phenomenon of falling proces of the commodities in the basket is known as deflation. Due to the inflation  a unit of currency effectively buys less than what it was purchasing before the inflation thus it decreases the purchasing power.  There are several causes of Inflation like excess money supply or money in circulation leads to increased dedemand thus causing inflationary pressure. On the other hand demand and supply gap leads to low production and high demand thus increasing the prices of product.

Difference between Demand push and Cost pull Inflation:-

First of all the difference between demand push and cost pull inflation lies in their meaning as cost pull inflation is a result of increase in the cost of (inputs) production like wages and reduced aggregate supply. On the other hand demand pull inflation is a result of price rise as aggregate demand is more than the aggregate supply. Demand pull inflation is basically an upward pressure on prices. Thus it arise because of shortage of aggregate supply as  aggregate demand increases at a faster rate. Demand pull inflation is caused by increased mony supply or currency in circulation on the other hand cost push inflation is a result of monopolistic groups in an economy controlling the input sources.  

Apart from the to control the cost push inflation administrative contrcontrols are suggested on the other hand in case of demand pull inflation fiscal and monetary mmeasures are advisable. At the same time demand pull inflation is also casued by incresed government spending or expenditures so in order to control it they must also be reduced. Thus we can say that under demand pull inflation too much dollar is chasing to few goods.