Apr 17 2007
IB – Demand-pull or cost-push?
Published by Jason Welker at 10:03 am under AD/AS Model,Inflation
Fuel, food prices lift CPI but core CPI in line with target – Mar. 16, 2007
As we learned in chapter 8, inflation rears its ugly head in a couple of ways. Here’s a recent article the rising price level in the US. Read it, and post your comments and analysis. Which kind of inflation is discussed in this article?
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About the author: Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course.
Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this authorRelated posts:
This is obviously a cost push situation. This rise in fuel prices causes a dramatic cost push in the macroeconomics of the U.S. Since fuel is an intermediate good, because it is used almost in the production of every single good or service in this world, literally, every single good and service. Fuel is needed to transport goods to different places, which basically covers every single good. Thus, if the cost of using fuel increases, it causes the aggregated demand curve to shift in because higher production costs is a determinant of supply. As a result, the GDP will decrease in the U.S. and price levels will rise. If the price levels rise dramatically, it may result in inflation within the country. As mentioned within the article.
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The form of inflation in this article is cost-push inflation because of the increase in gas and food prices. Both of these goods are important resources in the production of almost all goods and services, therefore if these increase so too will the prices of everything increase, thus causing inflation. However this kind of inflation will die out because it is not sustainable because the increased cost will decrease supply and therefore also lower real output and employment and these factors will further exacerbate the problem.
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This is an example of cost-push inflation. As the article says, "higher gasoline and food prices pushed the cost of consumer goods up in February." Food and gasoline prices have such a big impact on the overall costs of good and services on the market. Food is something that everyone needs to consume in order to survive no matter how poor you are, and in some cases make up a large portion of a family's income. Gasoline is a intermediate good for almost all goods and services, since it is required for transportation of raw materials to production and to the market. Therefore, the aggregate cost curve would shift outward because of this increased overall cost of production, therefore inflation occurs, and GDP goes down. This is usually undesirable. In demand pull inflation however, costs of production stay relatively the same, but demand for goods increase. This type of inflation is more desirable, as it also means GDP increases.
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This is obviously cost-push inflation because according to the article "higher gasoline and food prices pushed the cost of consumer goods up." Because the increase in general prices–in other words an inflation–is a result of increasing costs of resources (for, gasoline and food are necessary in the production of countless goods and services, such as transportation), this type of inflation is a cost-push inflation, and not a demand-pull inflation. In order for the inflation to be a demand-pull inflation, it should be the increasing demand for goods or services–so great that the producers have trouble meeting the excessive demand–that raise the prices of goods and services, and not the increasing cost of resource prices.
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Cost push. Without a doubt. It is explicitly mentioned in the article's title "Fuel, food push prices higher."
Looking deeper, fuel and food are essential to everyday life, and virtually all production. A rise in these prices, therefore, should result, and has resulted in an increase of the general prices, a.k.a the CPI.
In this situation, the consumer will be able to buy less for the money he already has. Although it reduces productivity, the positive outcome is that the price mechanism is working. The cost push will decrease demand, thus relieving the strain on many resources, until those resources are no longer relatively scarce.
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I could fight the need to jump on the bandwagon and say this is demand-pull inflation…except that its not. As the prices of fuel and food are rising–both of which are essential resources in the production of almost any good in society–aggregate supply (all of the supply in a particular economy) shifts inwards due to the increased cost, leading to an increase in the price of the good produced. An accumulation of increased prices in all goods which require fuel or food in their production then leads to inflation. Cost push inflation is much less desirable than demand-pull inflation due to the fact that in cost-push inflation, GDP decreases, while GDP increases when inflation is caused by a demand-pull. (PS. WE WON APAC!!!)
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YEAH FOR SAS GIRLS — THEY WON APAC!! Great performance girls, let's hear it for Manon!! Her cat is safe for now!
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The economy is definitely going through cost-push inflation, as the article begins “Higher gasoline and food prices pushed the cost of consumer goods upâ€. These abrupt increases in the costs of raw materials and energy inputs- gasoline and food- have on occasion driven up per-unit production costs and thus product prices. As prices surge upward, the costs of producing and transporting virtually every product rises, declining output and unemployment, while increasing the general price level. In this scenario, costs are pushing the price level upward, whereas in demand-pull inflation demand is pulling it upward.
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This is a cost push inflation Food and Gasoline prices are rising increasing the resource costs. With higher resource costs, the Aggregate supply curve is shifted leftward thus leading to an increase in price level or inflation. Thus this is a cost push inflation.
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