Cost push inflation shown on the AD AS graph

Summary

This video explains the concept of cost-push inflation, where rising input costs, such as wages or materials, cause a decrease in aggregate supply. As supply shifts leftward, the equilibrium price level rises, leading to inflation. In the short run, higher input costs push prices up, resulting in inflation. However, over time, labor demand decreases due to high labor costs, eventually bringing prices back down to equilibrium in the long run. The video outlines both short-run and long-run effects on inflation through the aggregate supply and demand model.

Takeaways

• 📉 Cost-push inflation occurs when the price of inputs, like wages or raw materials, increases.
• 📊 The aggregate supply and demand model helps explain cost-push inflation with real GDP on the x-axis and price level on the y-axis.
• 📈 An increase in input prices leads to a leftward shift in the aggregate supply curve.
• 💵 The leftward shift in aggregate supply raises the equilibrium price level, leading to inflation.
• ⚙️ Examples of input price increases include rising wages or higher costs of manufacturing goods.
• 🟢 In the short run, the increase in input costs causes inflation as the price level rises.
• 🔄 Over time, the economy adjusts, and the equilibrium price level may stabilize.
• 📉 In the long run, higher labor costs can decrease labor demand, causing wages to drop.
• 🔁 The economy returns to its long-run equilibrium real GDP level once input costs stabilize.
• 📖 Not all courses cover the long-run aspect of aggregate supply, but it is important for understanding the full picture of cost-push inflation.

Q & A

What is cost-push inflation?

Cost-push inflation occurs when the price level of inputs, such as labor, raw materials, or production costs, increases, leading to a decrease in aggregate supply and a rise in the overall price level.

What model is used to explain cost-push inflation in the video?

The aggregate supply and aggregate demand (AS-AD) model is used to explain cost-push inflation.

What happens to aggregate supply when the price of inputs increases?

When the price of inputs increases, aggregate supply decreases, resulting in a leftward shift of the aggregate supply curve.

How does a leftward shift in aggregate supply affect the price level?

A leftward shift in aggregate supply raises the equilibrium price level, leading to inflation.

What types of input price increases can cause cost-push inflation?

Cost-push inflation can be caused by increases in the price of labor (wages), materials, or other inputs used in production, such as factory costs or resources like DVDs for media production.

What happens to real GDP in the short run when cost-push inflation occurs?

In the short run, real GDP decreases due to the reduction in aggregate supply, but prices increase as the equilibrium price level rises.

How does cost-push inflation affect the economy in the long run according to the video?

In the long run, the economy returns to equilibrium as input costs like labor adjust downward, demand for labor falls, and prices eventually drop to restore equilibrium in real GDP.

What role does labor cost play in cost-push inflation?

Increases in labor costs, such as rising wages, are a key driver of cost-push inflation because they raise production costs, decreasing aggregate supply.

How do prices behave in the short run versus the long run during cost-push inflation?

In the short run, prices rise due to the increase in input costs and reduced aggregate supply. In the long run, prices may decrease as the economy adjusts and input costs, such as labor, return to lower levels.

Why might aggregate supply eventually increase again in the long run after cost-push inflation?

Aggregate supply may increase in the long run as labor demand falls, lowering wages and input costs, which can help restore the economy to its equilibrium GDP level.