Question

What are the causes of price rise? Explain each in detail.

Answer 1

Causes of price rise:
i. Public expenditure increases: Spending by the Government is an important part of total spending in any modern economy. It is the total spending which determines the total demand. Thus, Government expenditure is an important determinant of aggregate demand. Government expenditure has shown an upward trend in less developed countries. At the beginning of the planning period in India, the amount of Government spending has increased by leaps and bounds. This has created an inflationary situation in the economy.
ii. Hoarding: Excess demand is artificially created by hoarders. They stockpile goods and do not release to the market for sale. This leads to excess demand and inflation in the economy.
iii. Genuine shortages: Sometimes, the shortages may not be artificial but genuine. Because of some reason, the factors of production are limited in supply and production will be affected. Because supply will be less than demand, prices will rise.
iv. Population growth: Growth of the population will increase the total demand in the market. If the supply of goods and services does not keep pace with demand, the pressure of excess demand will create inflation.
v. Increases velocity of circulation: The total use of money in the market is the amount of supply by the Government multiplied by the velocity of circulation of money. During the boom phase of a business cycle, people spend money at a faster rate. The velocity of circulation of money increases. This situation creates an inflationary condition in the economy.