Question

(a) Sketch the Average Fixed Cost curve for a firm, and explain why it is the shape you have shown it. (b) Explain why it might be rational for a profit-maximising railway operator to offer lower prices to students than to other passengers. In particular, how might your answer to part (a) be relevant here? (d) How should the operator set its prices in this case?

Question 7
(a) Define the concepts of demand pull inflation and cost push inflation and, using a graph
with the aggregate demand (AD) and aggregate supply (AS) curves, explain how they
can interact.

(b) Explain and show in a diagram the main differences between equilibrium unemployment
and disequilibrium unemployment.

Answer 1

Q.7(a). Demand pull inflation happens when aggregate demand (AD) increases in an econmy and intersects the short run aggregate supply curve (SRAS) to the right of where SRAS and long run aggregate supply (LRAS) cross. This causes some inflation to occur in short run as the economy adjusts.

Demand pull inflation can occur for a reason that causes AD to increase but the most common are expansionary fiscal and monetary policy.

Cost push inflation happens when  SRAS shifts to the left (decreses) and intersects the AD curve to the left where AD and LRAS cross. This will cause inflation in the short run, but the prices will drop back down again in the long run as the labor market adjusts back to the equilibrium.