Role of Demand and Supply during INFLATION

Learning the basics of DEMAND and SUPPLY through Calvin and Hobbes

What is INFLATION ?
Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

Factors affecting inflation

Increase in the money supply. Decrease in the demand for money. Decrease in the aggregate supply of goods and services. Increase in the aggregate demand for goods and services.

How is Inflation Measured ?

Types of Inflation
1. Wage Inflation 2. Cost-push Inflation 3. Pricing Power Inflation 4. Sectoral Inflation 5. Fiscal Inflation 6. Hyper inflation

Inflation in India

Between 1950-1960

The inflation on an average was at 2.00%

Between 1960-1970

The inflation on an average was at 7.2%

Between 1970-1980

The inflation on an average was at 8.5%.

Inflation rates around the world in 2009

Effects of inflation

Effects on Demand and Supply

When the balance between supply and demand goes out of control, consumers could change their buying habits, forcing manufacturers to cut down production. Price increase can worsen the poverty affecting low income household. Inflation creates economic uncertainty and is a dampener to the investment climate slowing growth and finally it reduces savings and thereby consumption. The producers would not be able to control the cost of raw material and labour and hence the price of the final product. This could result in less profit or in some extreme case no profit, forcing them out of business. Manufacturers would not have an incentive to invest in new equipment and new technology. Uncertainty would force people to withdraw money from the bank and convert it into product with long lasting value like gold, artefacts.

Project by
PRITHVIN K RACHH MEGHNATH MAITY ARCHIE PATOLE HRISHIKESH JOSHI