Inflation is commonly understood as a situation of substantial and rapid increase in the level of prices and consequent deterioration in the value of money over period of time. It refers to the advantage rise in the general level of prices and fall in the value of money. Inflation is upward movement in the average level of prices.
Cause of Inflation
1. Demand Side increase in aggregative effective demand is responsible for inflation. In this case, aggregate demand …show more content…
The size of each firm is small. No individual firm can influence the market price. Hence, each firm will act independently without worrying about the policies followed by other firms. Each firm follows an independent price-output policy
Market is characterised by imperfections – Imperfections may arise due to advertisements, differences in transport cost, irrational preferences of consumers, ignorance about the availability of different brands of products and prices of products, etc. Free entry and exit of firms – Each firm produces a very close substitute for the existing brands of a product. Thus, differentiation provides ample opportunity for a firm to enter with the group or an industry. On the contrary, if the firm faces the problems of product obsolescence. It may be forced to go out of the industry
Element of monopoly and competition - Every firm enjoys some sort of monopoly power over the product it produces. However, it is neither absolute nor complete because each product faces competition from rival sellers selling different brands of the product
Similar products but not identical – Under monopolistic competition, the firm produces commodities which are similar to one another but not identical or homogenous
Non-price competition – In this market, there will be competition among