So yes, that is what inflation is, but it is not quite the cause of inflation. It's a necessary condition, but not sufficient. Something else besides more money, creates inflation. My theory was that because there is more money, suppliers anticipate this, or they see behaviors (like people being able to buy more), and then they see they can maximize more profit and increase their prices. — schopenhauer1

As I understand it inflation results when there is an overabundance of money and a scarcity of necessary and/or desirable items.

Or what would you declare an "ethical" price? The price that a supplier has to pay for the resources? The price that a supplier has to pay for resources plus a compensation his or her own "work"? (What on Earth is an "ethical" income for one's work?) — ssu

So the price wasn't good enough earlier before the high demand? Again, it is all micro-decisions. Costs don't go up for no reason.

We are not forced into slavery now days. — ssu

Never implied we should.

Every employer buys our work and we have the option to either take their offer or not to take it. Remember that every person is the "supplier" of his or her own work. — ssu

Actually, though theoretically true, I'm going to challenge this common notion. Really, a lot of luck and situational context is involved here since we have imperfect knowledge. Usually, we find a job through job boards or "head hunters". Sometimes it is through contacts. Either way, when we find these jobs, we don't necessarily know what we are getting into based on interviews. Sometimes the job is not as it seems. Sometimes the managers, owners, and coworkers are pricks. This isn't all apparent just from the day or two preview for an hour you usually get. Rather, by the time one realizes one doesn't like their work situation, one is already in it deep enough they have to keep going with it at least until they find another job. But it doesn't look good to job hop, so you have that working against you. It also could be timely and take time away from work.. Also, at the end of the day, people are forced into work because they need to survive if they don't want to be homeless, poor, or live in the woods and hack it in the wilderness (or weren't born into money). So there are a lot of small but significant factors that prevent people from fully getting a job they really prefer. Rather, a lot of it is simply giving up preferences, and sometimes those preferences are never met.

Also, the ridiculous notion that just by asking an employer for a raise, you will get one, or find a job that does indeed pay more, is ridiculous. Thus the sticky wages problem. As suppliers raise the prices, wages don't meet those price hikes. Sometimes employers won't do shit to raise their employees wage unless forced by unions or what not. So this defense of the fair employer, and ease of work preferences in the mark, as you seem to be making out is not so cut-and-dry.

Now days it's about just who gets the boost. Is it the few rich people or the one's working on the correct market sector, the one's in a labor union that has the ability to pressure the employers? Just what segment of the population get's the benefit? These things are complicated and politics come to the equation always. — ssu

Certainly do.

If you give people $1200 and they spend it... — schopenhauer1

...you have inflation. — schopenhauer1

Yes (all other things being equal), because inflation is, by definition, a relative increase in the money supply. The $1,200 "given to" various individuals, in this scenario, did not exist before it was given. It is new... an increase. Where that is felt is what remains to be seen. During the previous explosion of the money supply (QE1,2,3) most things did not experience a corresponding increase in price. That phenomena is reserved for where the money goes. The price of a burger at McD's didn't go up 300%...but equity markets did.

So, does the question/argument being proposed mean...

1] WHY does inflation lead to price increases?

or

2] SHOULD inflation lead to price increases?

One is "simply" a function of the supply-demand curve. The other is a matter of ethics/morality and thus, beyond consensus.

One is "simply" a function of the supply-demand curve. The other is a matter of ethics/morality and thus, beyond consensus. — Aussie

Well, one and two, seem almost the same to me, but maybe you can explain. I thought inflation was price increases on a large scale. My point was what is the origin of this phenomena in the supply-demand curve? My theory was it was the supplier raising prices. Sometimes it is to create more output, but a lot of times it is because they want to make an extra buck because they see an increase in demand.

As I understand it inflation results when there is an overabundance of money and a scarcity of necessary and/or desirable items. — Janus

Yes, but what actually causes the raising of prices? That's what my OP was trying to get at. Price increases come from a supplier trying to make more money, either to buy more resources for output or to make an extra buck, perceiving that they can do so.

It's just the upward pressure on price that strong demand and low supply brings about. Individuals will charge what they are aware, or at least what they think, the market will sustain. I'm not sure what is puzzling you about this.

It's just the upward pressure on price that strong demand and low supply brings about. Individuals will charge what they are aware, or at least what they think, the market will sustain. I'm not sure what is puzzling you about this. — Janus

I'm not puzzled. I'm giving a theory behind WHY the prices go up. You cannot just say low supply and high demand. Actual human DECISIONS make these things happen.

I'm not puzzled. I'm giving a theory behind WHY the prices go up. You cannot just say low supply and high demand. Actual human DECISIONS make these things happy. — schopenhauer1

Of course it is individual sellers who decide to raise their prices. But they do not do this in a vacuum. They will raise prices only if the items they are selling are scarce, and there is plenty of money and/or demand for the items in question in the system.

They will raise prices only if the items they are selling are scarce, and there if plenty of money and/or demand for the times in question in the system. — Janus

Okay.. you're still reiterating the result and not the cause. And why would they raise prices when resources are scarce?

And why would they raise prices when resources are scarce? — schopenhauer1

Because they believe they can sell the item for a higher price. It is the scarcity or abundance of goods that cause the rise or drop in price, but only if money is also plentiful or scarce, respectively.

Individual sellers only know that there is a general scarcity or abundance by following the market; that's what I mean by saying they do not make pricing decisions in a vacuum.

Because they believe they can sell the item for a higher price. — Janus

Yes, that's the part I was getting at.

Right, so the only thing that could countermand that tendency would be governmental or ethical price regulation. And this sometimes happens in situations when "price gouging" is condemned or outlawed.

Right, so the only thing that could countermand that tendency would be governmental price regulation. — Janus

Well, now you are going back passed it. I want to stick with the decisions to raise prices. That is a micro-decision made at an individual level. It is not an inevitability. And please don't use words like rational to just make circular justifications. Anyone can say a decision was rational if they agree with it.

Sure, but if you are seller and you perceive that other sellers are raising their prices due to increased demand and short supply, would it not be rational to go with the flow?

Also increased money supply generally causes a currency to lose relative value in the money markets, which means that purchasing power of, at least, imported items is reduced; and this also pushes prices up

Sure, but if you are seller and you perceive that other sellers are raising their prices due to increased demand and short supply, would it not be rational to go with the flow? — Janus

Ah, you just used that word. I requested you use other words as that has no meaning to me here. As I stated, this word can simply be used as a decision you agree with.

Also increased money supply generally causes a currency to lose relative value in the money markets, which means that purchasing power of, at least, imported items is reduced; and this also pushes prices up — Janus

Sure, another issue, but possibly same origins on the micro-decision level.

Yeah, I hear you. Technical definitions and what the folks on main street see can certainly be different. I'll attempt to clarify.

The first question requires an answer about human nature. If mankind is naturally or nurturally (forgive the abuse of grammar) selfish/discontent ... or altruistic/content... that is what will be borne out in experience and data such as is seen in supply-demand curves.

I think Machiavelli is spot on with regard to human nature:
"human appetites are insatiable, for since from nature they have the ability and the wish to desire all things and from fortune the ability to achieve few of them, there continually results from this a discontent in human minds..."

Interpreted, we (as a species) are never satisfied and always desire "more". I find that a fair assessment. And, being the case, when, for whatever reason, an average individual discovers an opportunity to achieve "more" they take it. Money is a good, for purposes of this argument, like others. It too has a price. We just identify that price in terms of groceries, electronics, vacations, stocks, etc. When there is relatively more of it, it falls in value compared to other goods (such as those noted) meaning we are less willing to give up those goods for what we would have before. The rarer (relatively speaking) a good is compared to other goods, the more we demand in return for trading it. When the supply of money doubles or triples, the goods previously mentioned become rarer, relatively speaking. This answer certainly leaves out allot, but it approaches a response.

The second question (about SHOULD) is meaningless until the first question is answered. Should it be the case that we always desire more? Is there a point at which we should be content? How are we to discover an answer to that? How are we to know we've discovered the right answer? Is there a "right" answer? It's attempts to answer the second question that has led to the plethora of political/economic philosophies. But even then, the answer to the first question, in my opinion, has remained unchanged. Across political and economic systems, mankind has continued to desire "more". It's why the supply-demand curve has done a reasonably good job explaining what we actually see...regardless of where and when we look (broadly speaking).

As I stated, this word can simply be used as a decision you agree with. — schopenhauer1

I'm not saying I agree with the decision ethically speaking, that is a different questions. To have a rational reason to do something is either to have a deductively valid reason (which does not seem apposite in this kind of case) or a practically valid reason (which does seem relevant to the kinds of cases we are considering here).

Sure, another issue, but possibly same origins on the micro-decision level. — schopenhauer1

If the value of currencies is determined by demand, that is only because people will buy a currency if they think it's price is low and it will go up, or sell a currency if they think it is high and will go down. Those criteria which govern buying and selling decisions are rational, in other words measured, given that the persons participating in the money markets are attempting to profit by doing so. Whether or not such activities are ethical is another question.

I'm not saying I agree with the decision ethically speaking, that is a different questions. To have a rational reason to do something is either to have a deductively valid reason (which does not seem apposite in this kind of case) or a practically valid reason (which does seem relevant to the kinds of cases we are considering here). — Janus

But what is the practically "valid" reason? What makes something "valid"? Against whose criteria? Why is that criteria the correct or only way it should be seen against?

The second question (about SHOULD) is meaningless until the first question is answered. Should it be the case that we always desire more? Is there a point at which we should be content? How are we to discover an answer to that? How are we to know we've discovered the right answer? Is there a "right" answer? It's attempts to answer the second question that has led to the plethora of political/economic philosophies. But even then, the answer to the first question, in my opinion, has remained unchanged. Across political and economic systems, mankind has continued to desire "more". It's why the supply-demand curve has done a reasonably good job explaining what we actually see...regardless of where and when we look (broadly speaking). — Aussie

Ok, so I originally called it greed, and was chastised for it. Others gloss it over as "rational". I think that is a cute way of putting it, but papers over an assumption of human tendency which seems more like what you are describing with Machiavelli. We always want more. An business owner who was perfectly content making profits at a certain price level may raise price levels if he perceives that he can make a better profit from raising prices. Everyone having more money will cause this perception in owners. But can there be owners who don't actually raise their prices? Is it ALWAYS the case that someone will want to raise their prices when they see an increase in demand? Is that an inevitability?

I do realize this can go the other way. If competition is lowering their prices and they can make more money that way, to keep up, the business owner would have to do the same or go out of business. This may be to their detriment if they don't have the technology or capital to get to that lower price level. If that is the case, they would have to market their product differently, perhaps as a premium good or specialize in a niche market the other company does not penetrate.

I originally called it greed, and was chastised for it. — schopenhauer1

You ought not have been chastised. Let's call a spade a spade. If by "greed" we mean an insatiable desire for more then that seems a fair description.

But can there be owners who don't actually raise their prices? Is it ALWAYS the case that someone will want to raise their prices when they see an increase in demand? Is that an inevitability? — schopenhauer1

But can there be owners who don't actually raise their prices? — schopenhauer1

Certainly. Markets are made up of thousands/millions of INDIVIDUALS making choices. There is absolutely room for differing choices. However, taken as a whole, markets show a strong tendency toward price increase in the presence of relative inflation...again, as a whole.

Is it ALWAYS the case that someone will want to raise their prices when they see an increase in demand? Is that an inevitability? — schopenhauer1

I would say, no, ALWAYS is too strong a word in this instance. There can, of course, be those who choose a different approach. Tools such as the supply-demand curve describe markets in aggregate. They show us a picture of things similar to seeing someone in the shower through shower glass. You can discern a great deal about them (they're naked, they probably male/female, they have short/long hair, they're facing this or that direction, etc etc) but there are plenty of details the glass distorts.

Point of clarification.

I said:

...we (as a species) are never satisfied and always desire "more". — Aussie

You asked:

Is it ALWAYS the case that someone will want to raise their prices... — schopenhauer1

I was speaking of the aggregate. As a whole, yes, markets show a very strong tendency toward that so I believe we may say "we (as a species)...always desire more." This is why supply-demand curves do a fair job of describing what we actually see.

You were asking about individuals and in that case, certainly, there is room for variation from the aggregate.

You ought not have been chastised. Let's call a spade a spade. If by "greed" we mean an insatiable desire for more then that seems a fair description. — Aussie

Interesting conclusion though. What I like is the equation with "rationality" as if that is the only way things must go.. But really then economic supply-demand theory is making a conclusion about human nature. That is a deeper philosophical stance than the theory lets on.

Certainly. Markets are made up of thousands/millions of INDIVIDUALS making choices. There is absolutely room for differing choices. However, taken as a whole, markets show a strong tendency toward price increase in the presence of relative inflation...again, as a whole. — Aussie

So taken as whole, most people are insatiably wanting more, and will always gravitate towards this tendency based on I guess, the majority of people's nature, which is to want more?

I would say, no, ALWAYS is too strong a word in this instance. There can, of course, be those who choose a different approach. Tools such as the supply-demand curve describe markets in aggregate. They show us a picture of things similar to seeing someone in the shower through shower glass. You can discern a great deal about them (they're naked, they probably male/female, they have short/long hair, they're facing this or that direction, etc etc) but there are plenty of details the glass distorts. — Aussie

So at the end of the day, putting this together, without using the words rational.. Why does government spending more money and money supply increase cause inflation? So again, I'm asking for a human-centered view here, with motivations not words like "market mechanisms" and things like that. Let's talk about the real decisions behind these models.

Equilibrium (roughly speaking)
-> A distorting event (shocks, booms, crises, , etc)
-->Disequilibrium (relative scarcities of goods, including money, change)
--->Mankind's insatiable desire sees an opportunity for "more" (eg. prices changes)
* working under the model that more money chasing the same number of goods means
consumers will be willing to part with more money for said goods
---->New equilibrium established

If you're driving at individuals see the chance to acquire (or preserve, as the case may be) more for themselves and that leads to adjustments in price levels...then we have no argument. I think it is as simple as that. As a whole, mankind is greedy, and takes advantage of disequilibriums.

As to why government spending and federal reserve actions which increase the money supply cause price inflation...they have the ability to cause larger disequilibiums in shorter periods of time than "the market" acting as a whole. For example, whereas the market can increase the money supply by making loans, they cannot achieve the levels the federal reserve can with their "printing press". It is similar for government spending.

A hypothetical, average, business then will anticipate the increase in demand ("new" money chasing after the same amount of goods) and adjust prices as they can. They want more...no less than you and I.

Those who do not, for whatever reason, will quickly find their shelves empty (being the cheapest game in town). And if the supply-demand curve tells us anything its that empty shelves mean prices could have been higher...demand exceeded supply. Somewhere between being unable to move any product and having bare shelves is a price point that "maximizes" return on investment. Bare shelves mean the business owner fell far short of that maximization...and human nature finds that discontenting.

and human nature finds that discontenting. — Aussie

That is indeed the heart of markets :smile: .

If you're running a business, you need to make a profit. The profit doesn't have to be excessive, but it has to provide you with a living; otherwise you can't live. If money is devalued, then it is devalued against everything, so if you want to continue living and running your business you need to adjust your prices in accordance with the market. To do so is practically rational, and thus, in that context, rationally valid and warranted.

That is indeed the heart of markets :smile: . — schopenhauer1

No doubt. Better said, an invisible heart moves the market more than some decapitated hand. At the risk of waxing religious...I think the book of Jeremiah hits the nail on the head.

"The heart is deceitful above all things, and desperately wicked: who can know it?"
Jer. 17:9

1) How would a Keynesian and Classical economist differ in their view of government spending and aggregate demand and aggregate supply?

2) I have a premise: Inflation is due to micro-decisions of greed on the part of the supplier to maximize as much profit as possible without pricing themselves out of the market.


1) A pure Keynesian believes demand creates supply. Effective demand is what supply *reacts* to. When there are less customers, the employer orders less for distribution and hires less workers. When there are more customers, the employer orders more for distribution and hires more workers. Ergo, demand creates supply. Which just means that supply reacts to demand, demand is the deciding factor in the economy. And that's why the role of the government is *essential* in Keynesian theory. Effective demand isn't a number, it's the life-blood of the economy. The deciding factor in a market system. Therefore, the government's role in printing money, keeping people employed, keeping credit stable etc. has a direct implication on the spending/investment rate in the economy, and therefore effective demand.

A neoclassical believes the market is efficient (efficient markets hypothesis) so the government usually gets in the way more than helps. And a classical economist sees aggregate demand and aggregate supply as two separate things. Not bound up together like a Keynesian.

2) It's certainly an aspect of real-world inflation. But you don't get taught that in the textbooks.

2) It's certainly an aspect of real-world inflation. But you don't get taught that in the textbooks. — h060tu

Right, it's "only" costs of labor and capital to produce more of the goods. Hehe.