Inflation, especially high inflation, increases profits as well as the cost of doing business and implies higher demand for products at higher prices and a tight employment market with rising wages. Investopedia reports that inflation, "Is not intrinsically good or bad."Know More
Inflation is present when prices are higher than they were previously. As of 2014, The Board of Governors of the Federal Reserve System reports that an inflation rate of 2 percent is consistent with the Federal Reserve's mandate for maximum employment and stable profitability. This small amount of inflation ensures that the economy is able to grow and that business are profitable enough to maintain and gradually expand workforces.
Inflation above 2 percent can cause an, "inflationary spiral." In this situation, prices are pushed higher by rising consumer demand. Businesses are profitable and hire aggressively to match production with demand. Tight labour markets lead to wage increases. This leads to a higher cost of living with higher rents, home values, consumer prices and prices of raw materials. This represents further increased demand for products and services, which also increases prices, further increasing company profits. These increased company profits again leads to more hiring, which continues to put inflationary pressure on wages and prices. The Business Directory describes this as, "Reinforcing feedback of a vicious circle"Learn more about Economics
The basic rights that form capitalism's foundation include the right to own private property and the right to own a business and keep profits after taxes are paid. In addition, capitalism supports the freedom to compete and the freedom of choice.Full Answer >
Wal-Mart reducing its prices to the point that the competition cannot compete, and American Airlines reducing its ticket prices to below cost and increasing the frequency of its flights are two examples of predatory pricing. By reducing their prices to these extremely low levels, large businesses hope to put small competitors out of business and create a monopoly. Large businesses can handle short-term losses if it leads to the elimination of competition in an area.Full Answer >
Factors affecting the quantity of items that consumers purchase, also called consumer demand, include cost, income level of consumers, personal tastes, consumer trust in future prices and the number of consumers purchasing certain items. Consumer demand for products is part of an economic concept called supply and demand. In an ideal economy, the marketplace finds equilibrium when product supply meets consumer demand and satisfies the needs of consumers and suppliers.Full Answer >
Perfect competition is characterized by factors like multiple sellers (or competitors), identical products on the market, sellers accepting rather than influencing market prices and free entry and exit into the given industry. In the actual business world, perfect competition is extremely rare, but it is an important economic concept.Full Answer >