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.
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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.
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.
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 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.