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Consider the following statements regarding Cost-Push Inflation:
1. It is inflation triggered by supply-side constraints.
2. It can only occur when demand is relatively elastic.
Which of the statements given above is/are correct?
1. It is inflation triggered by supply-side constraints.
2. It can only occur when demand is relatively elastic.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'A'. Can you explain this answer?
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Verified Answer
Consider the following statements regarding Cost-Push Inflation:1. It ...
• Cost-push inflation occurs when overall prices increase due to increases in the cost of production. Higher costs of production can decrease the aggregate supply (total production) in the economy. If the demand remains unchanged, the prices of commodities increase causing a rise in the overall price level which then is passed on to consumers creating cost-push inflation.
• On the other hand, Demand-pull inflation exists when aggregate demand for a good or service outstrips aggregate supply. It is the most common cause of inflation.
• Apart from the rise in prices of inputs, there could be other factors leading to supply-side inflation such as natural disasters or depletion of natural resources, monopoly, government regulation or taxation, change in exchange rates, etc. This is inflation triggered due to supply-side constraints. Hence, statement 1 is correct.
For cost-push inflation to take place, demand for the affected product must remain constant during the time the production cost changes are occurring. Cost-push inflation can only occur when demand is relatively inelastic. Inelastic demand is when people still buy the goods or services even if the price goes up i.e. demand remains constant even if price increases.• When demand is elastic, people won't pay for the higher prices. They simply buy fewer goods or they will either switch to a slightly different product. Hence, statement 2 is not correct.
• On the other hand, Demand-pull inflation exists when aggregate demand for a good or service outstrips aggregate supply. It is the most common cause of inflation.
• Apart from the rise in prices of inputs, there could be other factors leading to supply-side inflation such as natural disasters or depletion of natural resources, monopoly, government regulation or taxation, change in exchange rates, etc. This is inflation triggered due to supply-side constraints. Hence, statement 1 is correct.
For cost-push inflation to take place, demand for the affected product must remain constant during the time the production cost changes are occurring. Cost-push inflation can only occur when demand is relatively inelastic. Inelastic demand is when people still buy the goods or services even if the price goes up i.e. demand remains constant even if price increases.• When demand is elastic, people won't pay for the higher prices. They simply buy fewer goods or they will either switch to a slightly different product. Hence, statement 2 is not correct.
Most Upvoted Answer
Consider the following statements regarding Cost-Push Inflation:1. It ...
Cost-Push Inflation
Cost-push inflation is a type of inflation that results from an increase in the cost of production or supply-side constraints. This type of inflation can occur due to various reasons such as an increase in wages, increase in raw material prices, increase in taxes, etc.
Statements Regarding Cost-Push Inflation
1. It is inflation triggered by supply-side constraints.
This statement is correct. Cost-push inflation is triggered by supply-side constraints, which can result in an increase in the cost of production. For example, if the cost of raw materials or labor increases, the cost of production will increase, and producers will pass on this increased cost to consumers, leading to inflation.
2. It can only occur when demand is relatively elastic.
This statement is incorrect. Cost-push inflation can occur regardless of demand elasticity. In fact, in some cases, cost-push inflation can occur even when demand is relatively inelastic. For example, if there is a significant increase in the cost of oil, it can lead to an increase in the cost of production of various goods and services, including transportation, which can result in inflation, even if demand is relatively inelastic.
Conclusion
In conclusion, statement 1 is correct, and statement 2 is incorrect. Cost-push inflation is triggered by supply-side constraints, and it can occur regardless of demand elasticity.
Cost-push inflation is a type of inflation that results from an increase in the cost of production or supply-side constraints. This type of inflation can occur due to various reasons such as an increase in wages, increase in raw material prices, increase in taxes, etc.
Statements Regarding Cost-Push Inflation
1. It is inflation triggered by supply-side constraints.
This statement is correct. Cost-push inflation is triggered by supply-side constraints, which can result in an increase in the cost of production. For example, if the cost of raw materials or labor increases, the cost of production will increase, and producers will pass on this increased cost to consumers, leading to inflation.
2. It can only occur when demand is relatively elastic.
This statement is incorrect. Cost-push inflation can occur regardless of demand elasticity. In fact, in some cases, cost-push inflation can occur even when demand is relatively inelastic. For example, if there is a significant increase in the cost of oil, it can lead to an increase in the cost of production of various goods and services, including transportation, which can result in inflation, even if demand is relatively inelastic.
Conclusion
In conclusion, statement 1 is correct, and statement 2 is incorrect. Cost-push inflation is triggered by supply-side constraints, and it can occur regardless of demand elasticity.
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Consider the following statements regarding Cost-Push Inflation:1. It is inflation triggered by supply-side constraints.2. It can only occur when demand is relatively elastic.Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?
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