Differences Between Cost Push Inflation And Demand Pull Inflation
Question
Task: What are the main differences differentiating Demand Push and Pull inflation?
Answer
Introduction
To understand demand pull inflation we shall use aggregate demand and supply analysis to analyze elements of the demand and supply chain which will help determine parameters based on which demand pull inflation is influenced. This report will focus on the identification of two aspects namely
- Cost-push inflation and
- Demand push inflation
Inflation refers to the increase in product and service prices. Both the above factors are influenced directly by inflation making it important to first understand inflation and common causes of inflation before exploring the cost and demand effects inflation has on a business and economies operations growth and development. Demand push inflation is directly affected by cost and demand push inflation making it important to understand each factor and how it affects inflation
Cost-Push Inflation
Cost-push inflation occurs when there is a decrease in the number of goods and services occur in a market. Cost-push inflation usually occurs when the price of products and prices increases to a level above consumer comfort resulting in consumers not purchasing the goods and services. The safe effect is reflected in the supplier and manufacturing facilities resulting in a reduction of turnover and profits generated by the product or service. Due to the reduction in demand from consumers the manufacturer automatically considers alternative manufacturing processes which will reduce product prices. There are various strategies businesses used to realign the prices as per consumer expectations thus helping regain consumer confidence.
Causes of Cost-Push Inflation
There are various factors which cause cost-push inflation such as increased raw material costs, increase utility costs, labor and manufacturing costs and taxation among others. Each of these factors is likely to have a direct effect on the product or service price which is usually not accepted by consumers. Goods and service prices increase caused by cost-push inflation push consumers to search for alternative products and service which deliver similar products and services within their conform budget zone. With the increase in the use of social media, the repercussions of increasing a product or service price by even a few dollars can have major consequences on the brand and its consumer confidence. In many situations, the consumer will refute the price increase and even opt for alternative brands if the company announces the price increase publically. With this concern looming over consumer confidence and interest towards a brands products and services, alternative options have been developed to reduce consumer resentment towards product price increases. Consumers will in many situations never consider the factors causing the price increases and will simply complain regarding the price increase and quickly turn to alternatives which may be a short term action but one which will have a long term reaction on the company performance. To reduce this effect on the brand's performance, companies have adopted alternative strategies to help improve business operations and retain consumer confidence by avoiding price increases and compensating inflation via alternative strategies.
Managing Cost-Push Inflation
Inflation is inevitable due to several factors such as the depletion of natural resources and raw materials. This makes it impossible to prevent inflation from happening but companies have learned to adopt alternative strategies to address inflation which still delivering product and services to the customers at the same price. Inflation affects the cost and price of products and many of the consumers retaliate against inflation by boycotting products or services when the price increases. With the price being the main factor that consumers focus on with relation to product and service delivery, manufacturers have learned to avoid highlighting changed to the products or service price and compensate by adopting alternative approaches such as reducing the products net weight. Consumers do not focus too closely on the net weight of a product and less likely to react to minor changes which the company can announce using less popular modes of communication to help reduce consumer reactions. Another alternative commonly adopted by companies by increasing the product price but at the same time also introducing smaller packages to the market which cost less than the original one. These products may have a lower net weight or capacity but this they tend to developed popularity among the consumers due to being cheaper. Irrespective of the strategy a company adopts, price increases remain as the most impactful toward consumer resentment and the factor which most companies develop alternative approached to adopt when faced by product or price manufacturing inflation costs.
Demand pull Inflation
Demand pull Inflation refers to the increase in demand for products and services due to shortages and high consumer demand which automatically results in manufacturers increasing the prices. This is also a form of inflation which is directly influenced by consumer demand which automatically results in price increases influenced by the demand for products this influenced consumers to accept paying higher rates for available products and services irrespective of their price increase.
Causes of Demand Pull Inflation
The main factor influencing demand pull inflation is the low supply and availability of products and services in a market which triggers increased demand among consumers. This increase in demand than automatically increases the price for the products and services due to consumers being prepared to pay higher to get the products and service they require. Causes of reduced production can be reduced availability of raw materials, labor shortages, failed rainfall, assembly line and manufacturing equipment breakdowns among other reasons. This form of inflation mainly occurs when production is disrupted and competitors in the market fail to compensate production to meet demand. This form of inflation also commonly occurs when there is a single manufacturer in the market resulting in production and distribution monopoly. In this situation, consumers do not have the leverage to opt for alternatives and are forced to accept the price increase being imposed by the existing manufacturer. Another situation where demand pulls inflation occurs when consumers are dedicated and faithful to a single brand and unwilling to consider alternative options. One such example of this is Apple iPhones price increases. In this situation, the consumer does not focus on the price changes and willing to pay the demanded price for a product simply due to being a loyal customer to the brand. As observed, there are various factors which influence demand full inflation but each of these factors go in favor of the manufacturer as they can increase their prices and profits without expecting the consumers to react negatively and affect the brand's reputation.
Managing Demand pull Inflation
Inflation caused by demand pull is best managed through the intervention of central banks, the government and centralized bodies which have superior authority over business operations and management. This allows for regulations and legislature to be passed which centralize the rate of inflation and prevents inflation rates rising above a certain level. While inflation rates cannot be prevented altogether, centralized bodies can help reduce the rate of inflation considerably. The legislature can also help encourage more players in the industry and market which will help regulate product variation and companies manufacturing and delivering the products and services which would automatically deliver an alternative for consumers to turn to. Managing Demand pull Inflation is therefore mainly dependent on Centralized organization to curb the inflation rate. The easing of licensing and start-up policies will also contribute towards reducing the inflation as this will help the industry attract more players which will in turn increase product and service providers which would automatically reduce the product price. Demand pull inflation has a direct effect on consumer affordability making it important to regulate the services.
Conclusion
Inflation has a direct effect on the consumer but the situation influencing the inflation is determined by the availability of products and services as we well as alternative brand products in the markets. Lack of competitive markets offering various products reduces in push inflation where the consumer has no alternative to consider and is forced to accept and purchase the products irrespective of the product price they are being offered for. In pull demand inflation the consumer has the power to dictate their preference and purchase choice which places the product and service providers under pressure to ensure their products meet the consumer needs. To understand inflation it’s important to first assess the consumer and supplier markets to determine factors influencing the inflation based on which decisions can be made to reverse inflation or address consumer expectation and regain consumer confidence and a brands market position. Demand Pull Inflation assignments are being prepared by our economic assignment help experts from top universities which let us to provide you a reliable assignment help online service.
