Macro notes

Factors of production
Determinants of demand for goods and services
GDP nominal vs real
Aggregate demand
Fiscal policy vs monetary policy
Labor market
Consumption function
Classical vs Keynesian school of thoughts
Business cycle
Polices for inflation and unemployment
Equilibrium and interest rate
Real interest vs nominal interest
Unemployment

MICROECONOMICS- focuses on behavior of individuals and firms and their allocations of

resources

MACROECONOMICS- focuses on the structure and performance of the economy as the

whole

ECONOMICS- is a social science concerned with the production, distribution and

consumption of goods and services. It studies how individuals, businesses, government and
nation make choices about how to allocate resources

PRIVATE SECTOR- the part of economy that is run by individuals and companies for profits

PUBLIC SECTOR- part of the economy that is controlled by the government

FACTOR PAYMENT- payment for the factors of production (rent, wages, interest, profits)

FACTORS OF PRODUCTION

LAND: the income that resource owners earn in return for land resources is called RENT
LABOUR: labour is the effort that people contribute to the production of goods and services.
The income earned by labour resources is called WAGES
CAPITAL: the income earned by owner of capital resources is called INTEREST
(because businesses generally take out loans to purchase physical capital and the interest
rate is a primary factor in determining how much physical capital is purchased)
ENTERPRENEURSHIP: an entrepreneur is a person who combines the other factors of
production to earn profit

LAND-RENT
LABOUR-WAGES
CAPITAL-INTEREST
TRANSFER PAYMENTS- payments from the government to an individual for which no goods
or services are exchanged, rather income is redistributed from one group to another

DERIVED DEMAND
• Derived Demand: The demand for resources is directly related to the demand for the
products produced by those resources. As a result, it is said that the demand for
resources is a derived demand. That means if the demand for houses increases, the
demand for construction workers will also increase. If the demand for corn increase,
the demand for farmland to grow corn will increase. The reason for that derived
demand comes from changes in product demand causing changes in a resource’s
marginal revenue product.
• When the demand for a product is tied to the purchase of some parent product, it is
called derived or induced demand.
• Example – all raw materials
• Opposite- Autonomous Demand

TYPES OF RESOURCES

• Fixed resources – Fixed resources are fixed. They don’t change as you produce more.
• Variable resources – Variable resources do change with the more that you produce.
Ø When it comes to producing things economists like to differentiate between the
short run and long run.
Ø A company is in short-run when they have at least one fixed resources .
Ø Long run is more about what could potentially happen in the future. So in long run all
resources are variable.

LAW OF DIMNISHING MARGINAL UTILITY

The law of diminishing marginal utility states that all else equal, as consumption increases,
the marginal utility derived from each additional unit declines. Marginal utility is the
incremental increase in utility that results from the consumption of one additional unit.
"Utility" is an economic term used to represent satisfaction or happiness.

PRODUCTION FUNCTION

Key terms
• Total Product (TP) is the number of units a firm can produce with a given quantity of
inputs.

• Average Product (AP) is the total number of units a firm produced divided by the
quantity of inputs used.

• Marginal Product (MP) is the change in total product (the number produced by all
workers) from hiring one more worker. If more than one worker is hired, the
marginal product is the change in output (Q) divided by the change in the quantity of
labor.
Number of workers Number of Cakes Calculate Marginal Product

0 0 -

1 5 (specialization) 5

2 15(TP is increasing at increasing rate ) 10 (additional)

3 20 5

4 22 2

5 22 0

6 18 (TP is falling) 4 (leading to negative and also

because of fixed resource)

PHASES OF THE LAW OF DIMNISHING MARGINAL RETURNS

Ø Stage 1: Increasing returns- As you hire more workers you get increasing marginal
product (Increasing return)- Initially, adding to one production variable is likely to
improve the output as the fixed inputs are in abundance compared to the variable
one. Therefore, adding more units of the variable factor will use the fixed factors
more efficiently and increase production.
Ø Stage 2: Diminishing returns- As more units of the variable factor are added, the
overall production will continue to increase. However, during this stage, the total
product increases at a continuously decreasing rate. This process culminates with the
product reaching its maximum value, meaning that the marginal product becomes
zero. Optimum production is set somewhere within this stage. Adding more units of
the variable factor after this point will lead to the overall output starting to diminish.
Ø Stage 3: Negative returns - Excessively adding to the variable input after the point of
optimum production will eventually lead not only to a decrease in efficiency but even
to a negative return of production. The excess in the variable factor now hurts the
whole production process
MARGINAL REVENUE PRODUCT (MRP)
• This is the extra revenue a firm gains from employing an extra worker.
• The demand for a resource is equal to the marginal revenue product of that resource.
• Marginal revenue = price

QL MR MP MRP ( MR* MP)

1 $10 9 $90

2 $10 13 $130

3 $10 10 $100
 4 $10 7 $70

5 $10 4 $40

6 $10 1 $10

7 $10 -2 -$20

• A firm’s demand for labor is equal to the marginal rvenue product of those workers
( the most a firm would be willing to pay for a worker= money that worker brings in
by hiring them)

MARKET DEMAND FOR LABOUR

• The demand curve comes from the sum of each firms’s marginal revenue product.
• In macro economics- Businesses are the demanders (demanding labour)
• Households are the suppliers of labour .
CHANGES WITHIN THE FACTOR MARKET
LABOUR DEMAND AND SUPPLY SHIFT
• Labor demand curve is actually a derived demand.
• Productivity of workers , product price, product demand
• Any change will impact the marginal revenue product of these workers.
• The supply of labor can also shift – like #of workers, age , polulations , availability of
workers

EQUILIBRIUM WAGES

• The equilibrium comes from the interaction between supply and demand.
SHIFTS IN AD CURVE

} Shifts in the aggregate demand curve are caused by changes in consumption

expenditures, investment expenditures, government expenditures, and imports and
exports.
} Aggregate demand (AD) refers to the amount of total spending on domestic goods
and services in an economy. An aggregate demand curve shows the total spending on
domestic goods and services at each price level in a given time period. The
components of AD are as follows:
} Consumption (C)
} Investment (I)
 } Government spending (G)
} Net exports {X} - {M}X−M)
} Shifts in the AD curve can be caused by changes in any of the components of AD.
Changes in the price level will not shift the AD curve.
} GDP and AD are linked, when the aggregate demand decreases, GDP also decreases,
and when aggregate demand increases, GDP increases.

FOUR FACTORS THAT CAN CAUSE AD CURVE TO SHIFT

} 1) Changes in consumption expenditure (C)
When consumption expenditure increases, the AD curve will shift to the right. When
consumption expenditure decreases, the AD curve will shift to the left.
Example- changes in government tax policies can impact consumption expenditure.
When individuals are taxed at higher rates, they often spend less, which causes the AD curve
to shift to the left. Consumers’ after-tax income would decrease, and they would spend less
on goods and services. A decrease in personal income taxes would increase consumption
expenditure, which shifts the AD curve to the right. Consumers’ after-tax income would
increase, and they would spend a portion of this increase on goods and services.

} 2) Investment expenditure (I)

When investment expenditure increases, the AD curve will shift to the right. When
investment expenditure decreases, the AD curve will shift to the left.
} As firms become more optimistic about economic growth, they increase their
investment spending, shifting the AD curve to the right, increasing aggregate
expenditure and therefore GDP.
} Corporate taxation policies that affect investment can also shift the AD curve. If firms
are given an investment tax credit (or a rebate by the government), this would
increase aggregate expenditure and shift the AD curve to the right. However, if
corporate taxes are increased or firms become more pessimistic about the economy,
aggregate expenditure would decrease and the AD curve could shift to the left.
} Changes in government expenditure (G)
When government expenditure increases, the AD curve will shift to the right. When
government expenditure decreases, the AD curve will shift to the left.
} Changes in government regulations and other policies, direct government
investments, and legislation passed to provide an economic stimulus will shift the AD
curve.
} For example, legislation is passes setting aside funds for bridge construction. The
government hires contractors who build bridges, spending money on parts and labor.
In this case, aggregate expenditure increases and the AD shifts to the right.
} Net exports
If foreign incomes rise, consumers in foreign countries will increase their consumption
expenditure on all goods and services. They will buy more of other countries’ goods and
services as well as more of their own. Exports to the foreign country will rise, which
increases net exports. A decrease in foreign incomes would have the opposite effect. Exports
to the foreign country with declining incomes would decrease causing a decrease in net
exports and AD in the exporting country.
Changes in exchange rates will also cause the AD curve to shift.
Example- In the United States, a rise in the value of the dollar relative to other foreign
currencies will cause imports to the United States to rise and exports from the United States
to fall. (Foreign consumers of the United States' goods and services perceive that these goods
and services are more expensive relative to foreign goods.)

MARKET OF GOODS AND SERVICES

Total demand, personal consumption, government expenditure and investments

Goods and services are purchased by:

} households (consumption and investments),
} firms (investments)
} government
Goods and services provided by:
} firms

FINANCIAL MARKET

Financial market is a market, where households, firms and government:

} deposit their savings
} borrow money in order to finance investments
◦ buy a house
◦ build a new factory
◦ renew capital stock
◦ cover budget deficit.
Demand for loans:
} Investors: households, firms and government
Supply of funds:
} Households
} Government
Demand and supply affected by the interest rate (market price of borrowed money)

DETERMINANTS OF DEMAND FOR GOODS

There are four main determinants of the demand for goods and services
1. Consumption (C)
2. Investment (I)
3. Government purchases (G)
4. Net Export (NX)
The structure of total demand
Category % of GDP

Personal consumption expenditures 68,0

Gross private domestic investments 18,7

Government expenditure and investments 17.2

Net export -4,0

Us, 2021, q4

CONSUMPTION, C
def: Disposable income is total income minus total taxes: Y D=Y −T
(Disposable income is closest to the concept of income as generally understood in economics.
Household disposable income is income available to households such as wages and salaries,
income from self-employment and unincorporated enterprises, income from pensions and
other social benefits, and income from financial investments (less any payments of tax, social
insurance contributions and interest on financial liabilities).

} Suppose a family’s aggregate income is $150,000, along with an effective tax rate of
27%. The disposable income for the family will be $109,500 [$150,000 – (27% x
$150,000)].

Income Taxes are

paid
Y
Disposable
income Some income is
saved
Y-T
Consumption
C=C(Y-T)

The Keynesian consumption function expresses the level of consumer spending depending
on three factors.
 } Yd = disposable income (income after government intervention – e.g. benefits, and
taxes)
} a =autonomous consumption(consumption when income is zero. e.g. even with no
income, you may borrow to be able to buy food)
} b =marginal propensity to consume (the % of extra income that is spent). Also known
as induced consumption.
C = a + b Yd
} Consumption is primarily determined by the level of disposable income (Yd). Higher
Yd leads to higher consumer spending.
This model suggests that as income rises, consumer spending will rise. However, spending
will increase at a lower rate than income.
} At low incomes, people will spend a high proportion of their income. The average
propensity to consume could be one or greater than one. This means people spend
everything they have. When you have low income, you don’t have the luxury of being
able to save. You need to spend everything you have on essentials.
} However, as incomes rise, people can afford the luxury of saving a higher proportion
of their income. Therefore, as incomes rise, spending increases at a lower rate than
disposable income. People with high incomes have a lower average propensity to
spend.

The consumption function is the relationship between consumption and disposable income.
It is represented by an equation that models the factors that alter consumer spending—the
total individual and household purchases of consumer goods and services. The equation
indicates a reliance on changing incomes.

Marginal propensity to consume (MPC)

} is the increase in C caused by a one-unit increase in disposable income.

∂ C(Y D )
MPC=
∂YD

THE SLOPE OF THE CONSUMPTION FUNCTION IS THE MPC

DETERMINANTS OF CONSUMPTION FUNCTION

} Subjective factors
ü Unforeseen contingencies
ü Desire for self-display
ü Occupational motive
ü Far-sightedness
ü To leave a fortune foe one’s heirs
ü Improvement in production techniques

} Objective factors
ü Changes in income level
ü Wages and profit level
ü Windfall gains and losses
ü Changes in the rate of interest
ü Discovery of new product

} An increase in disposable income will increase consumption (which, in turn, is a

reason for an increase in aggregate demand). Potential increases in consumption
include a raise in current or expected future income or a decrease in taxes. All of
these factors will increase disposable income. Another factor that will increase
consumption will be the desire to save less. This is essentially an increase in MPC,
which increases the slope of the consumption function. If these factors move in the
opposite direction, it will lead to a decrease in consumption.

GOVERNMENT EXPENDITURE

} Defense and public administration

} Supporting social and cultural development
} Income allocation (transfers, benefits ect.)
} Investments in infrastructure
} For international organizations such as EU.

} Current spending
} Capital spending
} Welfare spending
} Debt interest payment
TAXES AND GOVERNMENT PURCHASES

Many types of taxes:

} Indirect taxes (VAT) - 30% of incomes
} Personal taxes (progressive) – 26% of incomes
} Corporate taxes (linear 19%) – 10% of incomes
} Social insurance – 25% of incomes
Government budget is balanced if
G=T ∈a fiscal year
(borrowing∈one year )
Most countries have a budget deficit.
G>T
Some countries have a budget surplus.
G<T
National Debt – total stock of debt over time . Accumulation of budget deficits.

INVESTMENTS

Investmetns

Households Firms Government

The
investment function is I = I (r ),
where r denotes the real interest rate,
the nominal interest rate corrected for inflation.
} The real interest rate is
◦ the cost of borrowing
◦ the opportunity cost of using one’s own funds to finance investment
spending.
So, r  I

r
Spending on investment goods
depends negatively on the real interest
rate.
INTEREST RATE
Two interest rates
} a nominal interest rate
} a real interest rate
Nominal interest rate: interest rate paid to banks for loans

MONETARY VS FISCAL POLICY

MONETARY POLICY
Every state today needs an effective economic policy in order to function well. It consists,
among other things, of fiscal policy and monetary policy.

Fiscal policy is about tax rates. It regulates them so that both businesses and citizens are as
active as possible, which promotes the development of the state.

Monetary policy, on the other hand, concerns interest rates. The Monetary Policy Council
adjusts the level of rates so as to raise or lower economic activity in the country.
Fiscal policy results in lower or higher tax rates.

The effect of monetary policy are high or low interest rates.

Fiscal policy regulates tax rates

Monetary policy regulates interest rates Fiscal policy regulates state budget revenues

Monetary policy influences market attractiveness

• Monetary policy is the branch of economic policy which manipulates the money
supply in society to regulate the aggregate market and manage the economy.
• Monetary base
The monetary base (or M0) is the total amount of a currency that is either in general
circulation in the hands of the public or in the form of commercial bank deposits held in the
central bank's reserves.
Eg: Narodowy Bank Polski the central bank of Poland

MONETARY BASE

MARKET
INCREASE/DECREASE IN MONEY SUPPLY
MONETARY POLICY TOOLS

• 1) Open market Operation

Open market operations (OMO) refers to the central bank practice of buying and selling
securities, along with other securities, on the open market in order to regulate the supply of
money that is on reserve in banks. The central bank purchases Treasury securities to
increase the supply of money and sells them to reduce long-term interest rates.
The objective of OMOs is to adjust the level of reserve balances to manipulate the short-
term interest rates and that affect other interest rates.

• Buying securities adds money to the system, making loans easier to obtain and
interest rates decline.
• Selling securities from the central bank's balance sheet removes money from the
system, making loans more expensive and increasing rates.

2) Discount Rate
Discount rate, also called rediscount rate, or bank rate, interest rate charged by a central
bank for loans of reserve funds to commercial banks and other financial intermediaries.
The discount rate serves as an important indicator of the condition of credit in an economy.
Because raising or lowering the discount rate alters the banks’ borrowing costs and hence
the rates that they charge on loans, adjustment of the discount rate is considered a tool to
combat recession or inflation.

THE RESERVE RATIO

• Also known as Cash Reserve Ratio, it is the percentage of deposits which commercial
banks are required to keep as cash according to the directions of the central bank.
• The reserve ratio is an important tool of the monetary policy of an economy and
plays an essential role in regulating the money supply. When the central bank wants
to increase the money supply in the economy, it lowers the reserve ratio. As a result,
 commercial banks have higher funds to disburse as loans, thereby increasing the
money supply in an economy.

On the other hand, for controlling inflation, the CRR is generally increased, thereby
decreasing the lending power of banks, which in turn reduces the money supply in an
economy

BUISINESS CYCLE

Business cycle is the sequence of following periods of economic growth and crises, affecting
the whole range of economic activities.
Conclusions:
• Business cycle influence the whole economy (not just one or few sectors).
• Periods of growth and crises follow each other

• A business cycle is a cycle of fluctuations in the Gross Domestic Product (GDP) around
its long-term natural growth rate. It explains the expansion and contraction in
economic activity that an economy experiences over time.
• A business cycle is completed when it goes through a single boom and a single
contraction in sequence. The time period to complete this sequence is called the
length of the business cycle.
• A boom is characterized by a period of rapid economic growth whereas a period of
relatively stagnated economic growth is a recession. These are measured in terms of
the growth of the real GDP, which is inflation-adjusted

CAUSES OF BUSINIES CYCLE

• William Stanley Jevons points out that climatic conditions- good or bad create boom
and depression
• Pigou is of opinion that variations in business confidence and other psychological
factors cause fluctuations in business.
• Caused by innovations ( Schumpeter)
• Under or over-consumption ( JA Hobson)
• Non-monetary factors (Hawtrey)
• Excess of investment over voluntary savings
• Autonomous investment and induced investment(JR Hicks)
PHASES
We typically distinguish two phases
• Expansion
• Contraction
Phases are separated by
• Trough: end of contraction
• Peak: end of expansion

STAGES

1. Expansion
The first stage in the business cycle is expansion. In this stage, there is an increase in
positive economic indicators such as employment, income, output, wages, profits,
demand, and supply of goods and services.
Debtors are generally paying their debts on time, the velocity of the money supply is
high, and investment is high. This process continues as long as economic conditions
are favourable for expansion.

• Recovery or revival
It is a period wherein, economic activities receive stimulus and recover from the shocks.
• Prosperity or full-employment – Full employment may be defined as a situation
wherein all available resources are fully employed at the current wage rate.
• According to Prof. Haberler “Prosperity is a state of affair in which the real income
consumed, produced and the level of employment is high or rising and there are no
idle resources or unemployment workers or very few of either.”

2. Peak
 • The economy then reaches a saturation point, or peak, which is the second stage of
the business cycle. The maximum limit of growth is attained. The economic indicators
do not grow further and are at their highest. Prices are at their peak. This stage
marks the reversal point in the trend of economic growth.

3. Recession
The recession is the stage that follows the peak phase. The demand for goods and
services starts declining rapidly and steadily in this phase. Producers do not notice
the decrease in demand instantly and go on producing, which creates a situation of
excess supply in the market. Prices tend to fall. All positive economic indicators such
as income, output, wages, etc., consequently start to fall.
4. Depression
There is a commensurate rise in unemployment. The growth in the economy
continues to decline, and as this falls below the steady growth line, the stage is called
a depression.
5. Trough
In the depression stage, the economy’s growth rate becomes negative. There is
further decline until the prices of factors, as well as the demand and supply of goods
and services, contract to reach their lowest point. The economy eventually reaches
the trough. It is the negative saturation point for an economy. There is extensive
depletion of national income and expenditure
6. Recovery
After the trough, the economy moves to the stage of recovery. In this phase, there is
a turnaround in the economy, and it begins to recover from the negative growth rate.
Demand starts to pick up due to low prices and, consequently, supply begins to
increase. The population develops a positive attitude towards investment and
employment and production starts increasing.

INFLATION

• Inflation refers to a general progressive increase in the prices of goods and services
in an economy. When the general price level rises, each unit of currency buys fewer
goods and services; consequently, inflation corresponds to a reduction in the
purchasing power of money.
• Some degree of inflation is natural, but excessive inflation can hurt consumers and
other participants in the aggregate economy.

INFLATION RATE

• Inflation means the average level of prices is rising.

• Inflation is a general, sustained upward movement of prices for goods and services in
an economy. Prices have tended to rise over time, which means that the inflation
 rate (the percentage increase in the average price level of goods over a period of
time) has been positive and as prices rise, the purchasing power of each dollar
diminishes.
• Example- A 2 per cent inflation rate means that (on average) a dollar buys 2 per cent
fewer goods and services than it did last year.
• To calculate inflation we must calculate the value of goods and services in the market
basket

MARKET BASKET

The market basket is a sampling of the most commonly purchased goods and services in the
aggregate economy year to year.

• The market basket is a representative sample of the consumer goods and services
that are most frequently purchased in the aggregate economy year after year.
• It typically includes goods purchased on a regular basis by consumers to determine
their value.
• To determine the current year's market basket of consumer goods and services, the
prices of each good in the market basket are added together.

• The inflation rate is calculated by taking the difference in the same market basket
sample between two years and dividing it by the sum of the market basket in the
base year of comparison.
• So, in 2020 we can conclude the price increase in Poland by 20% (2/10*100) between
2019 and 2020.
• Inflation rate shows the percentage increase or decrease in prices of goods and
services in the aggregate economy in a given year.

CONSUMER PRICE INDEX

 • In Disney land, there are only 3 goods: popcorn, theatre shows, and coke drinks.
The following table shows the prices and quantities produced of these goods in
1980, 1990, and 1991
• Q1) A "market bundle" for a typical family is deemed to be 5 popcorn, 3 movie
shows, and 3 diet drinks. Compute the consumer price index (CPI) for each of the
three years, using 1980 as the base year.
1980 1990 1991

P Q P Q P Q

Popcorn 1.00 500 1.00 600 1.05 590

Theatre 5.00 300 10.00 200 10.50 210

Show

Coke Drink 0.70 300 0.80 400 0.75 420

Q2- What was the rate of inflation from 1990 to 1991, using the CPI you calculated in (Q1)?

DEFLATION

• When the overall price level decreases so that the inflation rate becomes negative, it
is called deflation. It is the opposite of the often-encountered inflation.
• General decrease in prices is a good thing because it gives consumers
greater purchasing power.
 • Consumers are able to buy more with every dollar of disposable income.
• Maximize consumer utility

INFLATION

CAUSES OF INFLATION

The quantity theory of money inflation

A standard approach to analyse inflation is to use the famous “Quantity Theory of Money”
shown below. it is originally formulated by Polish mathematician Nicolaus Copernicus in
1517 and later popularized by economists Milton Friedman and Anna Schwartz.
The quantity theory of money states that money supply and price level in an economy are in
direct proportion to one another. When there is a change in the supply of money, there is a
proportional change in the price level and vice-versa.

It is supported and calculated by using the Fisher Equation on Quantity Theory of Money.

M*V= P*Y

where,

M = Money supply

V = Velocity of money

P = Price level

Y = volume of the transactions (real output/GDP)

• P= MV/Y
• That means, if prices are changing there are 3 possible causes
• Y- Real GDP
 • V- velocity of money – the average number of times that the dollar is used to
purchase final goods and services in a year.
• So of V and Y are relatively stable, that implies the only thing that cause an increase is
_____
• When money chases the same amount of goods and services , prices must _____

HYPERINFLATION

• Hyperinflation is inflation that exceeds 50 percent per month.

• The quantity theory can easily lead to a type of runaway inflation called
hyperinflation.
• Hyperinflation occurs in some countries because the government prints too much
money to pay for its spending.

DEMAND PULL INFLATION

• Demand pull inflation is defined as a situation where the total monetary demand
persistently exceeds the total supply of goods and services so that prices are pulled
upwards by the continuous upward shift of the AD function.
• It arises as a result of an excessive aggregate effective demand over an aggregate
supply of goods and services in a slowly growing economy.
• It occurs when the aggregate demand for a good or service outstrips aggregate
supply, and it starts with an increase in consumer demand. Sellers try to meet the
higher demand with more supply. If they can't, then they raise their prices.
• Supply of goods and services will not match with rising demand.
• When AD shifts to the right there is greater pressure on existing factors of production
to produce more output.
• Prices go up – wages, price of capital, price of land goes up and that will increase the
cost of production.
• Thus, firms will then pass on that higher cost via higher prices of goods and services.
Causes Of Demand-Pull Inflation: Demand-pull inflation is typically caused by consumer
demand out-pacing total available supply. The demand of consumers may be caused by a
number of things, including:
1. Rising Inflation Rate
When the inflation rate rises then demand for goods and services usually rises as well
because people want to protect their money by buying goods while they are still affordable.
For example, the costs of homes are driven greatly by demand in any given market. When
demand increases faster than houses are being built, home prices grow.
2. Overall Economic Growth
When the economy is doing well, demand for goods and services usually goes up because
people have more money to spend. This is a result of more people being employed or a
competitive job market that has driven salaries up for many. Consumers also tend to spend
more money when they aren't worried about the status of their job. A growing economy
gives consumers peace of mind.
3. Technological Innovations
When new technologies are introduced, demand for the products and services that support
them often goes up. For example, when a new iPhone is released there becomes an
immediate demand for a case that will protect that phone. When iPhones were fairly new,
the number of suppliers making these cases was few, which meant the demand often
outweighed the supply and people paid more than they might be willing to pay today.
While these are the main three causes of demand-pull inflation, they can also be triggered
by things like government spending, an increase in printing money, or asset inflation when a
currency is undervalued.

COST PUSH INFLATION

• It refers to a situation where prices rise on account of the increasing cost of

production.
• Example
• Demand for higher wages by the labour class.
• Fixing up of higher profit margins by the manufacturers
• Introduction of new taxes and raising the level of old taxes.
• Increase in the prices of different inputs in the market.