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Cost Push and Demand Pull There are many theories as to why inflation is created The two particularly most intertwined with one and other are cost-push and demand-pull inflation These two theories are generated from the ideas of John Maynard Keynes Both cost push and demand pull inflation can vastly affect an economic system that is stable because inflation is bound to increase Cost-push inflation has direct affects on many things in an economy first one has to understand why such a thing occurs Cost-push inflation occurs when a companys costs rise and to compensate they have to put their prices up For example if a companys worth rises because of the demand for the service or product that the company produces then the price of the product or service will rise This happens when more people desire a good or service the company has to raise the price because of the balance the faster production rate that has to meet the demand of the people thus creating inflation of prices These prices not only affect the price of one business but if the market is being stimulated very rapidly then the prices also go up therefore making prices increase to a higher level then before For example as Chrysler and other automobile producers increase their output to meet a surge in demand they must pay higher prices for inputs such as steel In addition they will add extra production shifts incurring increased overtime expenses for labor As a result the cost of producing an auto increase Higher production costs cause the supply curve to shift inward resulting in higher prices for automobiles The main cause of cost-push inflation is increasing prices of inputs used in production Another potential leading indicator of cost-push inflation is commodity prices Economists track the prices of various commodities from oil to gold As the prices of inputs such as copper rise the prices of outputs such
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