Economics 101 (#26) The Price Level (and Inflation)

Prices rarely stay the same for long. Over time, prices can rise or fall on most goods but usually, its one way traffic. Like a balloon, the rising of prices is called ‘Inflation.’ Remember that the price of any good is determined by the quality demanded and quantity supplied of that good (or, to use one word, scarcity). If a good is scarce, theres not much of it around but people still demand it so those who produce that good can charge more and increase their profits (think of oil).

If the cost/price of what you buy is rising at a faster rate than your income is growing – your real income (purchasing power) is falling (because you now can buy less per €). In a general sense, the government can control prices and incomes through taxation and other methods. But to do this, we need to measure prices.This isn’t always straightforward.

Heres the PDF PIIGSty Econ 101 #26 The Price Level

A big question then is whether inflation is a good thing or a bad thing? First of all, there are many different types of inflation and each has its own causes. Second, you’d think that the higher inflation runs, the less likely it is that our incomes are rising at the same rate – so high inflation is a bad thing?  The real answer is: It depends on who you are and what you do in the economy itself.

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