Frictional Unemployment
Kate just graduated from college and is looking for her first job.
Structural Unemployment
Paul did not finish high school and cannot find any employment.
Cyclical Unemployment
Sam is unemployed because the economy is in recession.
2. Aggregate supply is the total volume of goods and services produced by
an economy at a given price level. When there is a decrease in the
aggregate supply of goods and services stemming from an increase in the
cost of production, we have cost-push inflation.
http://www.investopedia.com/articles/05/012005.asp
Do you remember how much less you paid for things even two years ago? This increase in the general price level of goods and services in an economy is inflation, measured by the Consumer Price Index and the Producer Price Index. (see All About Inflation and What is inflation?) But there are different types of inflation, depending on its cause. Here we examine cost-push inflation and demand-pull inflation.
Factors of Inflation
Inflation is defined as the rate (%) at which the general price level of goods and services is rising, causing purchasing power
to fall. This is different from a rise and fall in the price of a
particular good or service. Individual prices rise and fall all the time
in a market economy,
reflecting consumer choices or preferences and changing costs. So if
the cost of one item, say a particular model car, increases because
demand for it is high, this is not considered inflation. Inflation
occurs when most prices are rising by some degree across the
whole economy. This is caused by four possible factors, each of which is
related to basic economic principles of changes in supply and demand:
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.In this look at what inflation is and how it works, we will
ignore the effects of money supply on inflation and concentrate
specifically on the effects of aggregate supply and demand: cost-push
and demand-pull inflation.
Cost-Push Inflation
Aggregate supply is the total
volume of goods and services produced by an economy at a given price
level. When there is a decrease in the aggregate supply of goods and
services stemming from an increase in the cost of production, we have
cost-push inflation. Cost-push inflation basically means that prices
have been "pushed up" by increases in costs of any of the four factors of production (labor, capital, land or entrepreneurship) when companies are already running at full production capacity. With higher production costs and productivity maximized, companies cannot maintain profit margins
by producing the same amounts of goods and services. As a result, the
increased costs are passed on to consumers, causing a rise in the
general price level (inflation).
Production Costs
To understand better
their effect on inflation, let's take a look into how and why production
costs can change. A company may need to increases wages if laborers
demand higher salaries (due to increasing prices and thus cost of
living) or if labor becomes more specialized. If the cost of labor,
a factor of production, increases, the company has to allocate more
resources to pay for the creation of its goods or services. To continue
to maintain (or increase) profit margins,
the company passes the increased costs of production on to the
consumer, making retail prices higher. Along with increasing sales,
increasing prices is a way for companies to constantly increase their bottom lines and essentially grow. Another factor that can cause increases in production costs is a rise in the price of raw materials. This could occur because of scarcity
of raw materials, an increase in the cost of labor and/or an increase
in the cost of importing raw materials and labor (if the they are
overseas), which is caused by a depreciation
in their home currency. The government may also increase taxes to cover
higher fuel and energy costs, forcing companies to allocate more
resources to paying taxes.
Putting It Together
To visualize how
cost-push inflation works, we can use a simple price-quantity graph
showing what happens to shifts in aggregate supply. The graph below
shows the level of output that can be achieved at each price level. As
production costs increase, aggregate supply decreases from AS1 to AS2
(given production is at full capacity), causing an increase in the price
level from P1 to P2. The rationale behind this increase is that, for
companies to maintain (or increase) profit margins, they will need to
raise the retail price paid by consumers, thereby causing inflation.
Demand-Pull Inflation
Demand-pull inflation occurs when there is
an increase in aggregate demand, categorized by the four sections of the
macroeconomy: households, businesses, governments and foreign buyers. .
