Pearson Edexcel · A-Level · Economics B
Course version: 9EB0 · Version from Sept 2015
Inflation: d) Causes of inflation: o demand pull o cost push
Inflation is driven by two distinct macroeconomic forces: demand-pull and cost-push factors.
Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .
- Point 4 of 6
- 3 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Inflation is driven by two distinct macroeconomic forces: demand-pull and cost-push factors. Demand-pull inflation occurs when aggregate demand outpaces aggregate supply, often summarised as 'too much money chasing too few goods'. This is frequently triggered by increased consumer confidence, lower interest rates, or higher government spending. Conversely, cost-push inflation happens when firms experience rising production costs and pass these onto consumers through higher prices. Common causes include surging raw material prices, increased wages, or higher indirect taxes. While demand-pull inflation is typically associated with economic growth, cost-push inflation can lead to stagflation, where prices rise alongside falling output.
What earns the marks
- Demand-pull inflation occurs when aggregate demand exceeds the economy's productive capacity.
- Factors causing demand-pull inflation include lower interest rates, tax cuts, and increased government expenditure.
- Cost-push inflation is caused by an increase in the costs of production for firms, independent of aggregate demand.
- Factors causing cost-push inflation include rising commodity prices, higher wages, and increased indirect taxation.
Common mistakes and how to put them right
Confusing the causes of demand-pull and cost-push inflation.
Put it right: Demand-pull relates to spending, while cost-push relates to production expenses.
Assuming that all inflation is harmful.
Put it right: Low and stable demand-pull inflation is often a sign of a healthy, growing economy.
Stating that a rise in the minimum wage causes demand-pull inflation.
Put it right: While it may increase spending, its primary direct effect on inflation is cost-push due to higher firm costs.
Exam tips
- Use aggregate demand and aggregate supply diagrams to visually distinguish between the two types of inflation in extended responses.
- When evaluating the impact of inflation, consider whether it is demand-pull or cost-push, as cost-push is generally more damaging due to its negative effect on economic growth.
- Look for clues in stimulus material, such as 'rising oil prices' (cost-push) or 'consumer boom' (demand-pull), to identify the type of inflation.
Try the lesson
The start of the Inflation: d) Causes of inflation: o demand pull o cost push lesson, made from checked teaching notes for this specification point.
Have a go first
Which of the following scenarios is an example of cost-push inflation?
Listen
Inflation is driven by two distinct macroeconomic forces: demand-pull and cost-push factors. Demand-pull inflation occurs when aggregate demand outpaces aggregate supply, often summarised as 'too much money chasing too few goods'. This is frequently triggered by increased consumer confidence, lower interest rates, or higher government spending. Conversely, cost-push inflation happens when firms experience rising production costs and pass these onto consumers through higher prices. Common causes include surging raw material prices, increased wages, or higher indirect taxes. While demand-pull inflation is typically associated with economic growth, cost-push inflation can lead to stagflation, where prices rise alongside falling output. A strong answer earns marks for these points. Demand-pull inflation occurs when aggregate demand exceeds the economy's productive capacity. Factors causing demand-pull inflation include lower interest rates, tax cuts, and increased government expenditure. Cost-push inflation is caused by an increase in the costs of production for firms, independent of aggregate demand. Factors causing cost-push inflation include rising commodity prices, higher wages, and increased indirect taxation. Exam tip: Use aggregate demand and aggregate supply diagrams to visually distinguish between the two types of inflation in extended responses.
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Key words
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Demand-pull inflation
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Cost-push inflation
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Stagflation
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See every definition
- Demand-pull inflation
- Occurs when aggregate demand outpaces aggregate supply, often summarised as 'too much money chasing too few goods'.
- Cost-push inflation
- Happens when firms experience rising production costs and pass these onto consumers through higher prices.
- Stagflation
- A situation where prices rise alongside falling output, which cost-push inflation can lead to.
Label the diagram
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1Box 1
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3Box 3
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