Inflation

A rise in the price level over a period of time is called inflation. If the rise in prices is very large and quick, the situation is known as hyperinflation. A fall in the price level over a period of time is called deflation. The value of money decreases during periods of inflation, and increases during periods of deflation. The situation when there is excessive demand for goods and services is called demand-pull inflation. Demand is excessive when people are willing and able to buy more output then the economy can produce.

Demand-pull inflation is characterized as "too much money chasing too few services". When demand for goods and services increases faster than industry is able to satisfy that demand, prices increase.

A period of rising prices due to an increase in the cost of production is called cost-push inflation. Cost-push inflation may be caused by one of the following factors: costs, wages, and/or monopoly power.

Inflation affects people differently: some suffer, others benefit. Those, who most suffer from inflation, are people living on fixed incomes, savers, lenders, and businesses.

Microeconomics and macroeconomics

Economics is the study of how people make choices to use scarce resources to satisfy their unlimited wants and needs.

Economic analysis is divided into two main branches: microeconomics and macroeconomics. Both are important in dealing with the problem of scarcity. Macroeconomics is one branch of economics that tries to explain how and why the economy grows and fluctuates over time.

The subject matter of macroeconomics is the performance of the economy in the aggregate and the underlying relationships between broad economic aggregates, and how those relationships alter over time. It is to be contrasted with microeconomics, which focuses primarily upon the rational decision-making processes of the individual unit. Macroeconomics is essential for good economic policy.

The other branch of economics is microeconomics – the study of the behaviour of individual consumers, firms, and markets. Microeconomics is concerned with how one market differs from another. Macroeconomics explains the determination of variables that microeconomics considers given. These variables include national income, the price level, and interest rates. Macroeconomics employs the basic ideas of microeconomics. When macroeconomists try to explain growth and fluctuations, they must look at the behaviour of consumers and firms, the organization of labour markets and industry.

The factors of production

Resources are basic elements used to produce goods and services.

Economists call all the resources that go into creating goods and services the factors of production.

The factors are natural, capital, human resources and entrepreneurship. Each factor of production has a place in an economic system, and each has an important function.

Natural Resources or Land. Natural resources are what nature provides to create goods and services. They include minerals, the soil, water, timber, wildlife and air. Economists also use the term land when they speak of natural resources as a factor of production.

The price paid for the use of land is called rent. Rent is income to the owner of the land.

Human Resources or Labour. Physical and mental effort of people in the production of goods and services are called labour or human resources.

The price paid for the use of labour is called wages. Wages are income to workers, who own their labour.

Capital resources represent human creations that are used to produce goods and services. There are two kinds of capital: human and physical. Human capital consists of the individual knowledge, talents and skills that people acquire. Physical capital is something which people create to produce other goods and services. Factories, tools, buildings, equipment, machines, roads, etc. are physical capital resources.

Payment for the use of someone else's money is called interest.

Some economists include management or entrepreneurship on the list of productive resources. Entrepreneurship is the imagination, innovative thinking, management and organization skills which are needed to start and operate a business.

The reward to entrepreneurs for the risks, innovative ideas, and efforts that they have put into the business are profits.