Economics

Concept of Inflation in Economics

len Alfred Ajibola - 18th October, 2020 @ 03:54 PM

Topics in Economics

Advantages of Inflation Disadvantages of Inflation Concept of Inflation in Economics Scheme of work for Economics, SS1, First Term Scheme of work for Economics, SS1, Second Term Scheme of Work for Economics, SS1, Third Term Functions of the Wholesaler Advantages and Disadvantages of the Wholesaler Wholesale Market: Who is a Wholesaler? Characteristics of the Wholesaler Retail Market: Who is a Retailer and Examples of Retailers Market: Types of Market Market - What is a Market in Economics? Elasticity of Supply: Types of Supply Elasticity Supply Elasticity: Elasticity of Supply explained Demand Schedule - Types of Demand Schedule Demand: What is Demand? Law of Demand Concept and Types of Cost Supply, Supply Curve and Law of Supply What is a Black Market, Its advantages and disadvantages


Academic Questions in Economics

Please check out our Test Your Knowledge page to see all Questions and Answers

The following statements are true concerning explicit opportunity cost except _____.

  • A. They are recorded in the accounts book

  • B. It is a type of cost

  • C. They may also be referred to as 'out of pocket' cost

  • D. They are utilized as factors of production

  • E. Money spent on wages, salaries and raw materials are examples of explicit opportunity cost

  • F. Explicit opportunity cost are always utilized for investment

Needs / Wants

Cost (Naira)

 Phone

 50,000

 Console Game

 120,000

 Laptop

 80,000

 Ipad

 100,000

 Smart watch

 85,000

 Ipod

 40,000

 

Which of the following statement is incorrect concerning the table?

  • A. Ipod is the least important need of the individual

  • B. If the individual has 200,000 Naira at hand, then the laptop, iPad, smart watch and iPod will all be considered as opportunity cost

  • C. If the individual has 480,000 Naira, he or she will purchase all the items in the table

  • D. Console game is the most important need of the individual

  • E. The table shows a scale of preference

  • F. The individual needs an ipod

Which of the following statement is false concerning scale of preference?

  • A. It is brought about by the insatiability of human wants

  • B. It is brought about by the limitation of cash at hand

  • C. It is a list of a person's needs or wants written in an order of importance

  • D. Scale of preference cost is the value of the best alternative a person could have achieved but did not achieve it after the best choice had been made

  • E. Opportunity cost is a term associated with scale of preference

  • F. None of the above

Eonomies of scale in economics means _____.

  • A. The prices of goods will remain the same because producers manufacture similar goods

  • B. The prices of goods will fall because producers manufacture more goods

  • C. The prices of goods will rise because producers manufacture less goods

  • D. The prices of goods will rise and producers will manufacture more goods

  • E. The prices of goods will fall and producers will manufacture less goods

  • F. Equilibrium is achieved in the economy

Budget deficit refers to the amount by which _____.

  1. total expenditure exceeds revenue
  2. capital expenditure exceeds revenue
  3. recurrent expenditure exceeds revenue
  4. recurrent expenditure exceeds capital expenditure
  5. capital expenditure exceeds recurrent expenditure
  6. total expenditure exceeds capital and recurrent expenditure

What are infant industries in Economics?

  1. They are industries that are allowed enough time to mature for recognition
  2. They are industries that produce baby foods in addition to mother care products
  3. They are industries that are too young to compete in a thriving society
  4. They are industries that are constantly introducing new products
  5. They are industries that are under a parent company
  6. They are industries located in rural areas

Which of the theory did Malthus became popular for?

  • A. Population may outgrow the means of subsistence
  • B. The people will eventually decide not to have children
  • C. The death rate may become so high that people may not be able to produce
  • D. Migration of people from one place to another may leave the world barren
  • E. All of the above

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Inflation in Economics:

Inflation, sometimes called price inflation is an important factor that will affect the citizens and residents of a nation either directly or indirectly. Interestingly, certain people gain from the events of inflation while others suffer from it.

You can read on the concept of citizens and residents here.

In economics, inflation (or price inflation) is defined as a gradual and sustained rise in price level of goods and services in relation to their availability; which will inturn lead to a decrease in the purchasing power of a nation's currency.

Inorder to simplify the above definition, let's consider an instance using the nation Nigeria as our point of reference.

You can read on the Nigerian National Symbols here.

Back in the days (let's say 1970), the Nigerian Naira (one naira) had a higher value than the American Dollar (one dollar). Infact, during that time, it was considered to be equivalent to the British Pound (one pound). Now, fast forward to October 2020, four hundred and sixty five naira (₦465) is equivalent to one dollar ($1) in the Nigerian black market. Using the parallel market as an instance, ₦385 becomes equivalent to $1.

Please read on black market, its advantages and disadvantages here.

From the above instance, if Nigeria import phones from America at one dollar each (in 1970), such phone will sell at a price lower than one naira. This is true because the Nigerian Naira at that time had a greater value than the American Dollar; and as such, ₦1 naira will purchase 2 phones since it's equivalent to $2 (as at 1970). To simply put it, the importer exchanges ₦1 for $2 in order to buy phones from America.

You can read more on foreign trade here.

On the contrary, the above instance of a phone which sells at price lesser than ₦1 in 1970 will now sell at a minimum of ₦385 in October, 2020. This becomes a fact because the Nigeria naira has lost its value to an extent that $1 is now equivalent to ₦385 in the parallel market.

The loss of monetary value is exactly what inflation does to the purchasing power of a nation's currency and the citizens ultimately suffers from this, especially if such country focuses more on the importation of products and services.

Please read on balance of trade and balance of payments here.

From the above explanations, Nigeria used to be a better country in 1970. During that time, the cost of living was quite low and the citizens could easily afford the basic amenities of life. As at now, the reverse is the case and corruption (birthing inflation) is its root.

Please read on your responsibilities, duties and obligations as a citizen here.

If you are a teenage student reading this article, kindly ask your parents or an elderly person about the cost of living during their days and in comparison to now (as at October 2020). Their answer should give you a perfect clue to what inflation does to a nation.

Note: Inflation isn't always a bad thing.

In another instance, a brand new car in Nigeria may cost about N2,000 back in the days; but fast forward to now, an equivalent car will cost over ₦1,000,000. Understand that the increase in the price of a car isn't due to the scarcity of cars; rather it was caused by the decreased value of the Nigerian Naira as a result of inflation.

Please read on elasticity of supply here.

Once again, it is important to state that inflation reflects a reduction in the purchasing power (or value) per unit of money.

At the time of writing this article, inflation had made 10 Kobo, 50 Kobo, 1 Naira and even 5 Naira valueless in Nigeria.

According to economists, when too much money circulates in an economy,  high rate of inflation (hyperinflation) results. To this end, we could also have low to moderate rates of inflation and such are believed to be caused by fluctuations in the demands of goods and services (or changes in the quantity of goods supplied and services rendered) during the periods of scarcity.

Please read on the concept of demand here.

In general, inflation becomes imminent when the economic growth of a nation occurs at a slower rate while a corresponding increase in money (within the economy) occurs at a rapid rate. In summary, inflation is generally seen in country that imports more and produces less.

You can read more on production here.

Note: Inflation can affect a nation both positively and negatively.

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Alfred Ajibola is a Medical Biochemist, a passionate Academician with over 7 years of experience, a Versatile Writer, a Web Developer, a Cisco Certified Network Associate and a Cisco CyberOps Associate.


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Amazing facts in Economics


NOTABLE POINTS IN Economics

The law of supply states that:

The quantity of the supplied services or goods will increase as the price increases and they will decrease as the price decreases provided all other factors remain constant.

These constant factors are very important when stating the supply law. They include:

  • The price of Input resources

  • The kind of technology used during production

  • The number of suppliers

  • The number of buyers; and so on.

 

A graph that shows the relationship between the price of a product or service, and its quantity supplied is the supply curve.

Supply curve can be defined as a graphical representation of the direct relationship between the prices of goods and services and the quantity supplied (of such goods and services) within a particular period of time provided all other factors remain constant.

Len Academy - Supply CurvePlease read more on the law of supply and supply curve here

Consider the table below:

Needs / Wants

Cost (Naira)

 Phone

 50,000

 Console Game

 120,000

 Laptop

 80,000

 Ipad

 100,000

 Smart watch

 85,000

 Ipod

 40,000

The above table shows us what a scale of preference would look like.

A scale of preference can be defined as the list of a person's needs or wants written in an order of importance.

You will observe that the person puts his most important needs or wants at the top of the list. Further down the list are his less important needs.

Now, let's imagine that this individual has 170,000 Naira to spend. According to the above scale of preference, the followings can be deduced;

  • A phone will be considered to be the most important; and it costs 50,000. He buys the phone.

  • A console game according to this person is next in importance; and it costs 120,000. He buys the console game.

Another question worth asking is:

  • What happens to his other needs?

This is where the term 'Opportinity Cost comes into play.

Please read more on scale of preference and opportunity cost here.

Scale of Preference can be defined as the list of a person's needs or wants written in an order of importance. 📜✍️

When you have a limited amount of money and could only buy some of the items on your list (the top items on the list); then the remaining items that you didn't buy will be generally considered as your opportunity cost.

Opportunity cost can be defined as the value of the best alternative that a person could have achieved or bought but couldn't achieve after the best choice had been achieved.

Opportunity cost are of two types. They are:

  1. Explicit Opportunity Cost
  2. Implicit Opportunity Cost

Please read on scale of Preference, Opportunity cost and the types of Opportunity cost here

Economics isn't just about money. It isn't just about economizing or efficiency or prudence at management.

In simple terms, Economics is a science that deals with the study of scarcity and choice.

Economics have 2 main branches. They are:

  • Microeconomics
  • Macroeconomics