Demand-Pull and Cost-Push Inflation

Inflation can occur for several reasons, and economists usually distinguish between two basic types of inflation, depending on whether it originates from the buyers' or the sellers' side of the market.

Perhaps the most familiar type of inflation is called demand-pull inflation, which is a rise in the general price level resulting from an excess of total spending (demand). Demand-pull inflation occurs when aggregate demand in the economy increases faster than the economy's productive capacity.

If demand exceeds aggregate supply, the average prices of goods and services are pulled up by the “excess” demand. Demand-pull inflation is often expressed as “too much money chasing too few goods.” When sellers are unable to supply all the goods and services buyers demand, sellers respond by raising prices. In short, the general price level in the economy is “pulled up” by the pressure from buyers' total expenditures.

This type of inflation is usually associated with conditions of full employment. If there are unemployed resources available, an increase in demand can be met by bringing these resources into employment. Supply will increase and the increase in demand will have little or no effect on the general price level. If the total demand for goods and services continues to increase, a full employment situation will eventually be reached and no further increases in output is possible (e.g. in the short run). Once the nation's resources are fully employed, an increase in demand must lead to an upward movement of prices. A situation of excess demand may arise when a country is trying to achieve an export surplus, in order, perhaps, to pay off some overseas debts. Exports are inflationary because they generate income at home but reduce home supplies. Demand inflation may develop when, with full employment, a country tries to increase its rate of economic growth.

Another possible cause of inflation under conditions of full employment is an expansion of government spending financed by borrowing from the banking system.

Cost-push inflation is an increase in the general price level resulting from an increase in the cost of production. Most sellers try to push these higher costs on into higher prices even if there is no change in aggregate demand in the economy.

One source of cost-push inflation is supply shocks, such as widespread and severe crop failures, the sharp increases in the price of oil instituted by a cartel, etc. The effect of a supply shock is to raise the level of input prices above the level that firms had expected.

Another possible source of cost-push inflation is the momentum of inflationary expectations generated by previous demand-pull inflation.

The influence of expectations on both demand-pull and cost-push inflation is also an important consideration.

Ex. 1 Match the following collocations with their Russian equivalents. Use them in the sentences of your own.

A	B
1) инфляция, вызванная превышением спроса над предложением (инфляция спроса) 2) инфляция, обусловленная ростом издержек (инфляция издержек) 3) избыток совокупных расходов (спроса) 4) инфляционные ожидания 5) рост цен 6) совокупные расходы 7) шоки предложения 8) расширение расходов правительства 9) общий уровень цен 10) избыточный спрос	a) an excess of total spending (demand)   b) total expenditures c) the general price level d) excess demand e) an expansion of government spending f) supply shocks g) a rise in prices h) demand-pull inflation i) cost-push inflation j) inflationary expectations

Ex. 2. Choose the correct answer.

1. Demand-pull inflation is caused by:

a. monopoly power;

b. energy cost increases;

c. tax increases;

d. full employment.

2. Demand-pull inflation occurs:

a. when ‘too much money is chasing too many goods’;

b. during a recession;

c. rising production costs;

d. none of the above.

3. Cost-push inflation is due to:

a. excess total spending;

b. too much money chasing too few goods;

c. resource cost increases;

d. the economy operating at full employment.

Ex. 3. Say whether the following is true or false.

1. Demand-pull inflation occurs when aggregate demand in the economy increases faster than the economy's productive capacity.

2. Demand-pull inflationary pressure increases as the economy approaches full employment.

3. Cost- push inflation is caused by too much money chasing for few goods.

4. Expectations do not have any influence on demand-pull and cost-push inflation.

Ex. 4. Expand the sentences.

1. The text deals with ….

2. Demand-pull inflation is associated ….

3. Cost-push inflation occurs when ….

4. The possible sources of cost-push inflation are ….

5. Supply shocks are caused by ….

Text 3

While reading the text put down key words and phrases from each paragraph and possible headlines that best express the main idea of each paragraph. Do the tasks that follow.

Does it Cost More to Laugh?

Are we paying bigger bucks for smaller yuks? Is there a bone to pick with the price of rubber chickens? Is the price of Groucho glasses raising eyebrows, the cost of Mad Magazine driving you mad, and, well, you get the idea.

Malcolm Kushner, an attorney-turned-humor-consultant based in Santa Cruz, California, developed an index based on a compilation of leading humor indicators to measure price changes in things that make us laugh. Kushner created the cost-of-laughing index to track how trends in laughter affect the bottom line. He is a humor consultant who advises corporate leaders on making humor work for business professionals. For example, humor can make executives better public speakers, and laughter reduces stress and can even cure illnesses. Kushner believes humor is America's greatest asset, and his consulting business gets a lot of publicity from publication of the index. His latest book, Successful Presentations for Dummies, provides the reader with 10 sites on the World Wide Web where speakers can find everything from quotations of famous people to an appropriate Murphy's Law, to general information material for your speeches. To combat rising humor costs, Kushner has established a Web site at http://www.kushnergroup.com. It organizes links to databases of funny quotes, anecdotes, one-liners, and other material for business speakers and writers. The exhibit with the Groucho face traces the annual percentage change in the cost of laughing that Kushner has reported to the media. On an annual basis, the cost of laughing index remained flat as a pancake at 4.4 percent between 1994 and 1995 and then did a belly flop to 3 percent in 1996, where it remained through 1999.

Closer examination of the laughing index over the years gives both happy and sad faces. The good news is that the price of an arrow through the head, singing telegrams, and ticket prices for several of the comedy clubs have remained unchanged since 1995. The bad news is that the prices of all the other items have increased. The major reason for more expensive humor is the price of writing a half-hour television situation comedy. Just like the CPI, Kushner's index has been criticized. Note that the fee for writing a TV sitcom dominates the index. Kushner responds to this issue by saying, "Well, I wanted the index to be truly national. The fact that this price dominates the index reflects that TV comedy shows dominate our national culture. If you can laugh for free at a sitcom, you don't need to buy a rubber chicken or go to a comedy club."

Ex. 1. Match the word with their definitions.

A	B
1) asset	a) an exclamation used to express strong distaste or disgust
2) sitcom	b) property owned by a person or company
3) groucho	c) a person who is often grumpy (gloomy)
4) attorney	d) a situation comedy
5) to track	e) a person appointed to act for another in legal matters
6) yuk	f) to follow the trail or movements

Ex. 2. Find information in the text to answer the questions.

1. What sort of index did Malcolm Kushner develop?

2. In what way do humor and laughter influence the work of business professionals?

3. What does Kushner believe to be America’s greatest asset?

4. What actions did Kushner take to combat rising humor costs?

5. How did the cost of laughing change between 1994–1999?

6. What good news does the examination of the laughing index provide?

7. What is the bad news about the laughing index?

8. What is the major reason for more expensive humor according to Kushner?