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Inflation BY AYUSSH SANGHI An Introduction Part 4.1
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What is Inflation? Inflation can be defined as: a rise in the general level of prices of goods and services . in an economy over a period of time.
What happens when Price Rises? In case the general price level rises: each unit of money/currency buy s fewer good s and services. Consequently, inflation also reflects erosion in the purchasing power of money.
Example " In 2013 1kg of wheat = Rs 50 In 2016 1 kg of wheat-Rs 80 . The above is increase in price of wheat. The Purchasing Power of money has declined as the same amount of good is available at higher price. . Hence, the above price rise of wheat over a period of time is called as inflation that is affecting the purchasing power of the people This in turn reduces the value of money as for each commodity we have to spend more than the previous one.
Something Interesting If I say, Not all price increase constitutes inflation, would you agree. .Prices of individual goods and services are determined in many ways Prices are determined on the basis of type of market like: Producer's Market Competitive Market
Something Interesting In Competitive markets: the interaction of many buyers and sellers and the operation of supply and demand determine prices. In Imperfectly Competitive markets: prices are determined by pr roducer's decision s In any economy,_prices are continuously changing as market adjusts to changing conditions.
Example Lack of rain may dry up grain fields, reducing supply and pushing up the price of agricultural products. . High levels of production by oil producers may be driving down the price of oil and petroleum products.
Rise in price of One Good v/s Many Goods When the price of one good rises, that price increase may or may not be part of a larger inflation. When prices of many goods increase simultaneously it can be called larger inflation. . Thus, inflation is an increase in the overall price level.
Rise in price of One Good v/s Many Goods . We measure inflation by looking at a large number of goods and services and calculating the average increase in their prices over a period of time. . It is useful to distinguish between a one - time increase in the overall price level and an increase in the overall price level that continues over tine.