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Definition of Cost

Definition of Cost

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Published by Ankit Gupta

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Published by: Ankit Gupta on Sep 12, 2011
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04/14/2012

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Definition of Cost-Push Inflation
The text "Economics" (2nd Edition) by Parkin and Bade gives thefollowing explanation for cost-push inflation:"Inflation can result from a decrease in aggregate supply. The
 
two main sources of decrease in aggregate supply are
 
An increase in wage rates
 
An increase in the prices of raw materialsThese sources of a decrease in aggregate supply operate byincreasing costs, and the resulting inflation is called
cost-pushinflation
 Other things remaining the same, the higher the cost of production, the smaller is the amount produced. At a given pricelevel, rising wage rates or rising prices of raw materials such asoil lead firms to decrease the quantity of labor employed and tocut production." (pg. 865)Aggregate supply is the "the total value of the goods and services
 
produced in a country" or simply factor 2, "The supply of goods".The supply of goods can be influenced by factors other than anincrease in the price of inputs (say a natural disaster), so not allfactor 2 inflation is cost-push inflation.Of course, the next question would be "What caused the price of inputs to rise?". Any combinations of the four factors could causethat, but the two most likely are factor 2 (Raw materials such asoil have become more scarce), or factor 4 (The demand for rawmaterials and labor have risen).

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