Theory Of Topic - Price And Inflation
Price and Inflation are two terms which are closely related to each other. The price of each item gradually increases over time. The cause behind this increase is inflation. Inflation in simple terms means a continuous increase in the price levels of goods and services over a period of time and continuously. Inflation rate is the rate at which the price of goods and services increase. In other words, it is the percentage of the levels of increase in the price levels.
Inflation happens because the power of the money to buy goods and services gradually decreases. When price of goods and services is concerned, it works on the principle theory of the forces of demand and supply in the economy. We know that the basic concept and in layman's language too, the market price is set at the point where there is an equilibrium in demand and supply. In reality however, there is quite a shift to this principle. Usually the price is set and demand and supply have to change according to that. The price changes due to inflation which affects it demand or supply depending which force is stronger, the producer's side or the consumer's' side. These phenomenon's are called Demand-Pull inflation or Cost-Push inflation, i.e. where the consumer demands are so high that it causes the prices to jack up and where the producer cost are so high that they have to increase the prices of goods and services.
There is also a type of inflation known as Monetary inflation which happens when there is an oversupply of money in the economy which reduces the value of money causing the prices of goods and services to go up as the same money can now buy less goods and services.
In many cases, the price of certain goods remains the same while their value offered decreases. For example, there is a bar of soap of 250 grams which has a price of $25 in the year 2010. In 2012, the bar of soap would still cost $25 while the quantity goes down to 200 grams. This is also a type of price inflation as the price has gone up but has been covered by offering a lower utility product.
It is important to note that price and inflation go hand in hand and are a cycle. It means that the wages that increase over the year are also to meet inflation rates, so wages, salaries and inflation go together. It is often seen that the wage rate hike is much lower than the inflation rate which causes dissatisfaction among laborers. The inflation rate and wage rate hike should in an ideal economy go hand in hand. Inflation cannot be considered as a negative term as it somehow helps the economy grow. If inflation were not there, it would show that an economy is weak and not progressing.
Problems Encountered In Solutions To Price And Inflation Problems
There are many problems while solving inflation problems. As mentioned above, to find the equilibrium price is a difficult process. It happens when the forces of demand and supply meet. In the problems, it may be so that the meeting point does not strike that easily. Also to adjust the price as per the inflation rate is quite difficult. The theory of price and the different types of inflation need to be kept in mind while solving price and inflation problems and assignments. The current rate of inflation and the expected rate of inflation rate have to carefully study to arrive to its relationship with the current market price and the adjustments as per the expected price after taking inflation into account.
Students often get confused about the different price levels and different rates given in the problem and do not understand which rate and price level should be used in what scenario which makes the problems difficult and takes a lot of time to solve them.
Also, in addition to this, there are various formulas and calculations which are to be taken into account for solving problems which can be difficult to learn.
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