economic change- inflation

What does price elasticity of demand refer to?

The responsiveness of demand to changes in price.

What happens when demand is elastic during a price rise?

A price rise leads to a more than proportionate fall in quantity demanded.

What is the result of a price rise when demand is inelastic?

A price rise leads to a less than proportionate fall in quantity demanded.

How are businesses with inelastic price elasticity of demand affected by inflation?

They are less affected by a rise in inflation.

What can some businesses do to handle price increases?

They can absorb price increases by becoming more efficient.

What does a fall in inflation signify?

It indicates a slowing down of the rate at which prices are increasing.

What is deflation?

A situation where inflation is negative, leading to a general decline in prices.

What is a short-term impact of deflation on consumer spending?

It can lead to a temporary boost in consumer spending and an increase in sales for firms selling necessities.

What might happen to wages in the long-term due to deflation?

Managers might reduce wages.

What two types of inflation are distinguished in economic studies?

Cost-push inflation and demand-pull inflation.

How can inflation benefit firms?

It can enable firms to raise prices, potentially increasing profit margins.

Name three adverse effects of inflation on a firm.

Increased costs, reduced purchasing power, uncertainty in pricing.

Why is inflation considered a larger problem for smaller businesses?

They may have less flexibility to absorb costs and face more significant cash flow pressures.

What is the effect of rising inflation on property prices and stock prices?

As inflation rises, property prices and stock prices increase.

How does high inflation impact consumer behavior regarding brand choices?

Consumers may switch to cheaper alternatives when high inflation leads to higher prices.

What is one consequence of high inflation on workers' real wages?

Workers become concerned about their real wages and may feel demotivated.

How might businesses respond to high inflation regarding wages?

Businesses may have to increase wages and negotiate with trade unions.

What does the price elasticity of demand influence during inflation?

It influences how businesses adjust pricing strategies and production efficiency.

What challenges do businesses face during high inflation related to cash flow?

Maintaining cash flow becomes harder as suppliers may increase prices.

What is the potential advantage of low levels of inflation for businesses?

Low inflation can lead to lower interest rates and opportunities for expansion.

How does low inflation impact negotiation with suppliers?

It can lead to better terms and trade credit negotiations.

What is a benefit of low inflation on local suppliers and imports?

It makes local suppliers cheaper and reduces costs of imported goods.

What impact does low inflation have on long-term strategic decision-making?

It creates more certainty in the market, allowing for more rational and considered decisions.

What is inflation?

A general rise in prices and a fall in the value of money.

How is inflation measured?

By the retail price index (RPI), which measures the cost of a representative basket of goods and services, and the consumer price index (CPI), which is similar to RPI but excludes housing costs.

What is the current rate of inflation in the UK as of August 2025?

3.8%.

What is Demand Pull Inflation?

Inflation that occurs when there is excessive demand in the economy, leading businesses to raise prices to increase profit margins.

What is the Bank of England's inflation target?

2%.

What are some causes of Demand-Pull Inflation?

Excessive demand, depreciation of the exchange rate, reduced taxation increasing disposable income, rising consumer confidence, and faster rates of economic growth in other countries.

What is Cost Push Inflation?

Inflation that occurs when the costs of production are increasing.

What are some causes of Cost Push Inflation?

External shocks like commodity price fluctuations, depreciation in the exchange rate, and acceleration in wages.

What happens during inflation?

Firms raise prices to protect their profit margins, especially when market demand is price inelastic.

What is the relationship between wages and prices in inflation?

Wages often follow prices, leading to rising inflationary expectations.