Account for the recent increase in the inflationary pressure in Bangladesh and find remedies

 In recent months, we see several opinion pieces on the various aspects of inflation in Bangladesh. Inflationary pressure has been increasing again in recent months. The latest figure shows a 7.41 percent inflation in November. Fuel import, energy price hike and Taka’s devaluation against the US dollar have combined to increase Bangladesh’s non-food inflation. Food inflation has also increased, although not by the same amount.

The country’s general inflation has also been in double digits for some time now. The last time it happened was in the early 1980s. In addition to price hike of electricity and fuel oils, and devaluation of taka, the rise in government’s spending and credit growth in both public and private sectors have also contributed to the rise in inflation.

 

Prices of a number of essential food commodities have also increased in recent months. However, despite the best of intention of the Ministry of Food, the retail prices of food grains in the local market have increased significantly in recent months and are likely to increase further until the next harvest. This raises concerns about economic stability and food insecurity as the purchasing power of low-income families has been reduced.

 

Last year, the International Monetary Fund (IMF) had asked the Bangladesh Bank to tighten monetary policy to contain inflation. The IMF recommended, among other measures, safeguarding reserves through continued exchange rate flexibility and interventions only to

smooth short-term volatility, and addressing financial sector vulnerabilities by strengthening and enforcing bank supervisory framework and market oversight and ensuring sound governance.

 

Over the last few months, the Bangladesh Bank has followed a restrictive monetary policy by raising rates on a number of occasions. The Bank has also increased statutory liquidity ratio and cash reserve requirement in an effort to keep inflation in check.

 

However, the problem with such an effort is that these policy measures would be adequate if only excess demand were driving inflation. Inflation caused by changes on the supply side of the market would remain mostly unaffected by the policies recommended by the IMF and undertaken by the Bangladesh Bank.

A look at the causes of inflation would show that in recent months changes the supply side has been as much of a factor in raising the inflation rate as changes in the demand side. In short, inflation in Bangladesh has been both a cost-push and demand-pull phenomena.

 

Rapid increase in the prices of food items eroded the purchasing power as well as standard of living of the poor, government and non-government employees, industrial workers, the unemployed and the people with limited income. This has forced a section of the population to drop below the poverty line.

 

Remedies of inflation:

 

1. REDUCE DEMAND PRESSURES

 If inflation is caused by high demand then

 * Raise interest rates to reduce consumers disposable incomes

* Raise interest rates to discourage borrowing and demand

* Raise taxes to reduce disposable income and spending

* These policies should all reduce peoples ability to spend too much money

 

2 REDUCE COST PUSH PRESSURES

If inflation is caused by high costs

• Limit wage increases if possible e.g. public sector workers

• Force electricity and gas companies to hold their prices

• Increase the value of £ in order to reduce the cost of importing

 

3. REDUCE MONEY SUPPLY PRESSURES

 If inflation is caused by too much money in the economy

 • Print less money

• Withdraw some money from circulation.

How equilibrium price and output are determined by a monopoly firm

 Price and Output Determination in Monopolistic firm

Monopolistically competitive industries are made up of a large number of firms, each small relative to the size of the total market. Thus, no one firm can affect market price by virtue of its size alone. But firms differentiate their products, and by so doing gain some control over price.

 

Price/Output Determination in the Short Run

 Since the firm has a downward-sloping demand curve, it will also have a downward-loping marginal revenue (MR) curve. A profit-maximizing firm produces where marginal cost (MC) equals marginal revenue (q0 in the graph below) and charges the price determined by demand (P0).

 

 

In panel (a) of the figure, the monopolistic competitor will make a profit. However, like a monopoly, a monopolistic competitor is not guaranteed to make a profit in the short run. The firm may make a loss in the short run; its profitability will depend on the demand. This is shown in panel

(b) Price/Output Determination in the Long Run

The action in a monopolistically competitive market occurs when the market moves to the long run.

Since other competitors selling a similar good can enter the market, two changes will occur: Firm demand will decrease.

Firm demand will become more elastic.

 

As more firms enter the market, the demand for any one firm will decrease, since the firm is now sharing the market with other firms.

 

A decrease in demand implies a leftward shift in the demand curve. Since the entering firms are producing substitutes for the existing firm’s good, the demand for the existing good will become more elastic. An increase in elasticity implies the demand curve is getting flatter. By combining these effects, as a monopolistically competitive market moves from short-run profits to the long run, the firm’s demand curve will move to the left and get flatter. Furthermore, the demand curve will

continue to move until there are no more firms entering the market. Firms will stop entering the market when profits are zero.

 

This occurs when the demand curve just barely touches (i.e., is tangent to) the ATC curve, as shown in the figure above. Once the demand curve is tangent to the ATC curve, the profit-maximizing price is equal to the average total cost, and thus, profits are zero. In the long run, competition will drive monopolistically competitive markets to make zero profits. The goal of the firm is to try to maintain

as much short-run profit as possible by differentiating its product. Eventually, though, in the long run, economic profits will be zero.