Inflation Reforming Economies

Week 2 Case Studies

Inflation Reforming Economies

Summary of Case Study (insert here). At least one short paragraph. Summary of Case Study (insert here). At least one short paragraph. Summary of Case Study (insert here). At least one short paragraph.

Considering this case study

In a market for a typical consumer good in a former communist country under central planning the quantity produced was fixed by the state. The supply curve can be drawn as vertical S1 as shown in the diagram below. The demand curve however looks typical for a demand curves everywhere. The higher the price the less people want to buy.

During the 1980’s, for a variety of reasons, production of consumer goods decreased. The reasons included increased defense production, unhappy work force, depletion of natural resources, an aging capital stock, and a decrease in the ability to import goods from the west.

Now, having an understanding about the situation at hand there would be a significant shift in price and supply but demand will remain the same or may decrease (see chart below). Price for the good would increase due to the depletion of natural resources and the inability to import goods from the west. Seeking goods elsewhere may be more expensive therefore needing to raise prices to import goods from other countries.

Supplies are scarce due to the depletion of natural resources therefore increasing prices to implement better technologies for producing natural resources at a faster pace. Now that the good is depleting from lack of supply, the demand for the good stays the same because consumers still need the good.

Central planners should have predicted and prepared for such a shift to keep inflation down. Given the circumstances in this scenario, planners should have lessened the supply quantity to begin with at a higher price and gradually decrease the price when distributing the quantities put aside for future demand. This would have bought some time to allow the planners to implement strategies on providing way the increase their supply of goods.

If excess income is not spent on producing consumer goods, the funds would more likely be spent on increase for defense production, research in using affordable alternate natural resources, and possibly fund training