Rising per-unit production costs at the firm (inputs) are most directly associated with:
Group of answer choices
A frictional unemployment.
B cost-push inflation.
C demand-pull inflation.
D structural unemployment
The correct answer and explanation is :
The correct answer is:
B. Cost-push inflation
Explanation:
Cost-push inflation occurs when the overall price level in an economy rises due to an increase in the cost of production inputs. These rising per-unit production costs can be caused by higher wages, increased raw material costs, supply chain disruptions, or other external factors like higher energy prices or government-imposed tariffs.
When firms face higher production costs, they often pass these costs on to consumers in the form of higher prices, leading to inflation. This type of inflation is different from demand-pull inflation, which is driven by excessive consumer demand.
Here’s how cost-push inflation works:
- Increase in Input Costs – If the price of labor, raw materials, or other essential inputs rises, firms must pay more to produce the same amount of goods.
- Higher Production Costs – Firms experience higher per-unit costs, making it more expensive to maintain production at the same level.
- Price Increases – To maintain profit margins, businesses pass the increased costs to consumers, leading to higher prices across the economy.
- Inflationary Spiral – If workers demand higher wages to keep up with rising costs, businesses may increase prices further, creating a cycle of inflation.
Cost-push inflation is often associated with negative economic shocks, such as oil price spikes, natural disasters affecting supply chains, or geopolitical events that limit resource availability. It differs from demand-pull inflation (option C), which is driven by excessive demand rather than rising costs.
The other options:
- A. Frictional Unemployment refers to temporary joblessness as workers transition between jobs.
- D. Structural Unemployment occurs when workers’ skills no longer match job market demands.
Thus, the best choice is B. Cost-push inflation.