Answer to Question #143693 in Economics of Enterprise for Qasim uddin

Question

Keeping the present rate of inflation (increase in the general price level) in mind, consumers living in Karachi are anticipating that the price of tomatoes will go up just like it did last year in November. In your opinion explain if there would be any impact on the current demand for tomatoes or not. Also, if there would be any change elucidate the movement or shift in the demand curve graphically.

Answer 1

This form of cost-push inflation as anticipated will result in high prices of tomatoes. In order to compensate, the increase in costs is passed on to consumers, causing a rise in the general price level or inflation. For cost-push inflation to occur, demand for tomatoes must be static or inelastic. That means demand must remain constant while the supply of tomatoes decreases.For cost-push inflation to occur, demand for goods must be static or inelastic. That means demand must remain constant while the supply of tomatoes decreases or the supply curve shifts downwards as the demand curve doesn't shift at all.