MONEY AND INFLATION — Economics STD 12 Commerce — Question
Gujarat BoardEnglish MediumSTD 12 CommerceEconomicsMONEY AND INFLATION1 Mark
Question
How increase in production cost leads to inflation?
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Answer
Increase in Cost of Production:
The main factor affecting the price is supply.
The important factor affecting supply is production cost.
According to economist, increase in production of goods or service creates inflation.
After 1950 demand is not responsible, but production cost is more responsible for inflation.
The inflation which is cause due to increase in production cost is called "Cost-push inflation".
If there is an increase in cost of raw material, machines, water rates, worker's wages or transportation there is an increase in price of goods or services.
The inflation cause due to increase in production cost is called "Cost-push inflation"or “Supply shock inflation."
Expenses such as wages, cost of raw material, electricity, transportation cost etc.
are more responsible for price rise. According to few economist, demand pull inflation is not responsible for price rise but cost of production is responsible.
To maintain the stability in prices of goods they adopt steady wage-rate policy.
A major cause of the cost-push inflation is the rise in the wage rate even when there is no excess demand of labour or there is considerable unemployment in the economy.
This is possible in modern economy where collective bargaining by trade unions produces wage rates to rise.
If the rate of increase in wage is greater than that of productivity, the wage cost per unit of output increase.
As a result, supply decreases at the existing price level.
Hence price of product rises.
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