Effects of changes in prices:
Changes in prices affect various sections of the community in distinct ways. They affect distribution and production too.
Effects on production:
When prices are increasing, it will stimulate production. Beneath a capitalistic system, production is fetched on mainly for profits. Throughout a period of rising prices (i.e., inflation), there will be an abnormal gains. These increases productions. Therefore manufacturers and businessmen gain throughout inflation. Producers and businessmen gain throughout inflation. Producers expand by inflation as during that period prices increase faster than costs. Therefore they make enormous profits. However when inflation becomes hyper-inflation, it might end in a crash. On account of the quick drop in the value of money, profits that are in the form of money might become valueless. And there will be a “flight from currency”. Inflation might become a significant cause of “violent revolutions and economic chaos”.
In a period of diminishing prices, businessmen incur enormous losses as prices fall quicker than costs. And there will be very little scope for investment. These outcomes in unemployment on big scale. There will be business depression. Throughout depression, money might be cheaply obtainable, prices of materials will be low, and men will be obtainable for work however there will be no employment, no investment, no incomes and no demand for goods. Such a condition has been elucidated as ‘poverty in the midst of plenty.’ The Great Depression of 1930s is a condition in point.
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