You are in a room, where there’s a guy who want to sell Parle G biscuit packet. Total money with you is rupees 5. No another bidder for biscuit packet is present in room. Only you, the buyer & the Parle-G guy, who is seller.
Total good = 1 Parle G biscuit; Total money = Rs 5
What do you think, will be the price of Parle-G biscuit packet ?
The price is going to be rs 5, as this is the maximum money Seller can get & Maximum product you can buy, as nothing else is available.
Instance 2) Total good = 1 Parle G biscuit; Money what you are holding is 500 crore.
Let’s make a deal.
As there is still nothing to buy other than Parle-G, You have to give 500 crore to purchase this packet of biscuit & 500 crore is the maximum money seller can get.
5 rupees to 500 crore? what is happening here ?
Rupees value or purchasing power just eroded. Rupee was the monetary unit, you used in exchange for Parle-G. At Instance 1, same 5 rupee purchased a biscuit packet. But in instance 2, as No other Parle-G are available, you purchased same quantity for 500 crore.
This ‘500 crore – Rupees 5’ is Inflation.
Instance 3) There are 100 packets of Parle-G available in room, Total money with you is 500 crore.
What do you think will be value of 1 parle-G ?
The value will be 500 crore/100. That is 1 Parle-G is now worth 5 crore.
-Products in room increased. Money remained same. So Value of Parle-G decreased, compared to instance 2.
This brings us to crux of whole unit. As long as Parle-G Manufacturing will increase and keep pace with money supply in room, we won’t notice any inflation. But if Parle-G Supply become stagnant and money supply kept increasing, we will notice inflation.
If extra money is being released in an economy (read country), and that isn’t leading to Inflation ! what actually is happening in that particular country ?
If every new single penny is soaked in economy, i.e turned into economic activity , that money will never leave us with inflation.
In our example, Until unless five hundred crore aren’t channelized to new economic activity (say making of more Parle-G’s), the money will contribute to inflation.