Business Economics Demand Pull and Cost-Push

Question: Describe about the Business Economics for Demand Pull and Cost-Push. Answer: (a) If the wages of cleaners is increased in a burger shop, the supply of burgers will be reduced due to increase in the cost of production. Figure 1: Decrease in Supply (Source: Created by Author) The graph shows that supply from S to S2 that in turn leads to excess demand at the old equilibrium cost P (Canto, Joines and Laffer 2014). (b) Since burger is considered as a normal good and as a result, with the fall in income the demand for burger will decrease. Most of the goods that we usually purchase are considered as normal goods. They are also considered as a superior commodity (Atkinson and Stiglitz 2015). Figure 2: Normal Good (Source: Created by Author) A single seller who sells a unique good in the market characterizes a monopoly market structure. The seller does not face any competition in the monopoly market, as he is the single owner of commodities with no close substitutes. On the other hand, an industry is a natural monopoly when a single firm can supply a commodity to a complete market at a subordinate cost (Askar 2013). Figure 3: Monopoly (Source: Created by Author) The above graph shows that more quantity Q2 can be sold at a lower price P2. The slope of the AR curve is downward sloping under monopoly that in turn implies that if the monopolist sets the high prices, the demand will decrease. Under the monopoly market structure, there is bound to be interaction between the forces of demand and supply (Anton and Biglaiser 2013). Under perfect competition price is equivalent to marginal cost at the equilibrium output. However, under monopoly the price is larger than average cost. When the Reserve Bank of Australia intervenes in the foreign exchange market, it generates demand as well as supply for the Australian dollar by purchasing or selling Australian dollars against a different currency. In the exchange market of the Australian dollar, the RBA always conducts its interference due to the fact that liquidity and earnings are utmost in that market. Most of the transaction of the foreign exchange intervention of the RBA takes place in the spot market. Traditionally, the Reserve Bank of Australia has usually chosen to intervene by performing in the foreign exchange market in its own name (Benes et al. 2015). The benefits to Australia of the appreciation of the Australian dollar are as follows: With the appreciation of the Australian dollar, Australian exports are bound to become more costly. The imports into Australia will become reasonable and as a result, there will be increase in demand for imports. This has the probability to worsen the current account deficit (Garton, Gaudry and Wilcox 2012). The preferential trade agreement that Australia shares with China mainly includes a currency deal. This in turn allows the Australian dollar to trade directly against the currency of China. China has also allowed RMB to be traded against the AUS dollar directly. As a result, if the foreign investors become optimistic about China, it would lead to an increase in the demand for RMB. The economic interaction between Australia and China is likely to provide a wider implication for the Asia-Pacific area both in terms of state capital flows as well as in terms of financial security (Bowman, Gilligan and OBrien 2015). The percentage change in the value of the Wholesale Price Index on a yearly basis is termed as inflation. It efficiently measures the change in the prices of a basket of commodities and services in a year. The imbalance between demand and supply of money as well as changes in the cost of production and distribution leads to inflation (Bresciani-Turroni 2013). The major cause of inflation is merely the growth in the quantity of money. The level of prices and the value of money also lead to inflation. There are mainly two types of inflation that includes demand-pull inflation and cost-push inflation. Figure 4: Demand-pull inflation (Source: Created by Author) Demand-pull inflation takes place when aggregate demand for commodities and services in an economy increases more rapidly as compared to the productive capacity of the economy (Addison and Burton 2013). Figure 5: Cost-push inflation (Source: Created by Author) On the other hand, cost-push inflation takes place when prices of production procedure inputs rise. Increasing wages are also a major factor that leads to cost-push inflation as wages are considered the most imperative cost for firms. The two economic policies that the government could apply to reduce inflation are as follows: Fiscal Policy: The government can raise taxes as well as cut spending. These in turn improves the budget circumstances as well as help to reduce demand in the economy (Auerbach and Gorodnichenko 2012). 2. Monetary Policy: The rate of interest could be increased by the Central Bank that will in turn make borrowings more costly and saving more attractive. The quantity theory of money states that the wide-ranging level of prices of goods and services is directly comparative to the amount of money in circulation or money supply. It mostly states that there is a direct relationship between the quantity of money in an economy as well as the level of prices of commodities and services sold (Su et al. 2016). According to Quantity Theory of Money, if the amount of money doubles in an economy, the level of price also doubles. According to the economists, a rapid increase in the money supply leads to a rapid rise in inflation. Money growth that exceeds the expansion of economic output results in inflation. If the makers of the monetary policy decrease the supply of money, the rate of interest will get increased. If the rate of interest are determined by free economy it becomes more attractive in order to deposit funds as well as to diminish borrowing from the Central Bank. One of the rate of interest that is advertised in the free economy is the coupon rate. As per the economists, competitive markets allocate resources efficiently. According to the economists, efficient allocation of resources takes place when individuals are able to choose the commodities and services that they desire. Resources are being allocated effectively mostly when they are being used to manufacture the appropriate amount of goods as well as services that is desired mostly by the customers. Allocative efficiency requires that an individual produces each commodity up to the point where the advantage it conveys to the society. According to the economists, an efficient allocation of resources is the combination of distribution of inputs as well as outputs such that any alter in the economy that makes an individual better off. Efficiency is also obtained when there is efficiency in the production. In other words, the manufacturing of the largest value of commodities as well as services with available resources. It also takes when all mutual benefits gained from busin ess are exhausted (Rancire and Tornell 2016). The non-price determinants of demand are as follows: Branding: Sellers make use of advertising, product quality, and customer service as well as product differentiation. That in turn leads to strong brand images and as a result, the purchasers have a strong preference for their commodities. Hence, the demand curve shifts towards the right as the demand for products increases. Market Size: With the rapid expansion of the market, the demand of the customers for the goods is likely to increase (Verheyen 2015). Complementary goods: The demand for a commodity is influenced by the change in the price of the product. As a result, the demand for movies is likely to get impacted by the price of popcorn in the movie theatre. Similarly, the demand for movies in the particular theatre is also likely to get influenced due to the price of nearby parking. Available Income: If the amount of income of the purchasers alters, the propensity to purchase will also change. Thus, irrespective of price, if there is an economic boom, an individual is more likely to purchase. Seasonality: The requirements for commodities alter by time of year. As a result, there is a powerful demand for grass mowers in the spring, but not in the fall. Future Expectation: The purchasers are likely to purchase more commodities in the future, if they expect that the price is likely to increase in the future. The value of money is determined by the supply of money as well as demand for money that is similar to that of the price of a commodity. Quantity Theory of Money states that the general level of price (P) is directly relied on the supply of money (M). In other words, if M doubles, P will also double. On the other hand, if M is diminished, P will also diminish by the similar quantity (Cline 2015). The growth of the money supply determines the inflation rate. According to Quantity Theory of Money, if the amount of money doubles in an economy, the level of price also doubles. This in turn leads to inflation in the economy. As inflation increases, the value of money diminishes. References Addison, J.T. and Burton, J., 2013. The demise of demand-pull and costpush in inflation theory.PSL Quarterly Review,33(133). 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