IGCSE Economics Practice Test

Cost-push inflation occurs when the overall production costs of goods and services increase, leading businesses to raise prices to maintain their profit margins. This typically happens due to rises in the cost of raw materials, labor, or overhead expenses. When production becomes more expensive, the cost of the final product also rises, which can result in inflation as consumers are faced with higher prices. An increase in production costs can stem from various sources, including higher wages, increased prices for raw materials, or supply chain disruptions that limit the availability of necessary inputs. As producers pass these costs onto consumers, the result is a general increase in the price level, which is characteristic of cost-push inflation. Understanding this concept helps to clarify why the increase in production costs is directly linked to inflationary pressures in the economy, whereas the other options do not contribute to the phenomenon in the same way.