Cost-push inflation occurs when there is a rise in cost of production which will lead a fall in the aggregate supply that will lead to an excess demand condition, contributing to increase in price level. When the cycle becomes cyclical, it will develop as wage-price spiral or price-wage spiral.
As seen from the diagram, the rise in cost of production will lead to a fall in aggregate supply from AS0 to AS1 which will create an excess demand condition at P0 which will prompt the rise in price from P0 to P1.
Latest posts by Simon Ng (see all)
- Economics Tuition: Why should governments keep inflation rate low? - June 13, 2018
- Economics Tuition: Consider whether economic growth should be the top priority goal of a government.  - March 16, 2018
- Economics Tuition: Explain how tax changes can help Singapore achieve higher economic growth.  - March 16, 2018