Principles of Economics Essay Example | Topics and Well Written Essays - 2000 words

Principles of Economics - Essay Example Inflation has different components, phases and forms. For example, deflation and inflation are often defined in relation to the amount of general supply of money viz a viz the economys ability to generate goods and services This article will aim at discussing the causes, effects, impacts and importance of inflation in an economy There are various causes of inflation which have been put forward by various economists. The first type of inflation is the Cost Push Inflation. This type of inflation occurs when firms respond to the increase in production costs, by increasing prices in order to retain their profit margins. When general costs increase the firms have few options on how to absorb the costs from within, this situation forces the organization to pass on this cost to the consumers. The rise in prices may be triggered by several factors, these factors being an increase in the cost of imported raw materials. This may occur in countries which heavily rely on exports of such products. On the other hand, this may also occur by a fall in the rate of the pound in the international currency exchange a market which raises the UK price of imported products. An illustration of cost push inflation occurred when British gas and alternative energy suppliers decided to increase the prices of gas and electricity. This strategy made energy producing firms to charge different prices for the domestic and foreign markets during the period between years 2005 and 2006. The other cause associated with cost-push inflation is due to the increase in labor costs. When labor costs increase, the effects of this measure on the company production is passed over to consumers.   This cause is significant in those firms and organizations which are labor-intensive. Some industries may opt against passing this high cost to the consumer since they might be able to cover cost in other ways but in the long run they may be forced to increase