When does demand-side inflation occur?


Quick Answer

Demand-side inflation occurs when demand for a product at a particular price exceeds the product's supply. Out of the two types of inflation, demand-side inflation is the most common.

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Full Answer

There are typically two types of price inflation found in businesses. The first is called cost-push inflation. This type of inflation occurs when the price of production increases, so to offset the added price of production, companies will increase the price of their product, effectively pushing the price onto the customer. The second type of inflation is called demand-side inflation. This inflation occurs when there is more demand for a product at a certain price than there is supply. In this case, there are potential sales that are being wasted because there is not enough supply. Instead of increasing supply of the product, the price can be inflated which will decrease demand but potentially increase profit.

In the case of demand-side inflation, the cause of inflation is that there is actually a surplus of money in a market that can be spent on a specific product. When there is a surplus of money in the market, but the quantity of goods stays the same, then there is an imbalance of supply and demand. The most profitable response to this imbalance is price inflation.

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