There are also certain factors which operate on the opposite side and tend to reduce the aggregate supply.
Some of the factors are as follows:
1. Shortage of Factors of Production:
One of the important causes affecting the supplies of goods is the shortage of such factors as labour, raw materials, power supply, capital, etc. They lead to excess capacity and reduction in industrial production, thereby raising prices.
2. Industrial Disputes:
In countries where trade unions are powerful, they also help in curtailing production. Trade unions resort to strikes and if they happen to be unreasonable from the employers’ viewpoint and are prolonged, they force the employers to declare lock-outs.
In both cases, industrial production falls, thereby reducing supplies of goods. If the unions succeed in rising money wages of their members to a very high level than the productivity of labour, this also tends to reduce production and supplies of goods. Thus they tend to raise prices.
3. Natural Calamities:
Drought or floods is a factor which adversely affects the supplies of agricultural products. The latter, in turn, create shortages of food products and raw materials, thereby helping inflationary pressures.
4. Artificial Scarcities:
Artificial scarcities are created by hoarders and speculators who indulge in black marketing. Thus they are instrumental in reducing supplies of goods and raising their prices.
5. Increase in Exports:
When the country produces more goods for export than for domestic consumption, this creates shortages of goods in the domestic market. This leads to inflation in the economy.
6. Lop-sided Production:
If the stress is on the production of comfort, luxury, or basic products to the neglect of essential consumer goods in the country, this creates shortages or consumer goods. This again causes inflation.
7. Law of Diminishing Returns:
If industries in the country are using old machines and outmoded methods of production, the law of diminishing returns operates. This raises cost per unit of production, thereby raising the prices of products.
8. International Factors:
In modern times, inflation is a worldwide phenomenon. When prices rise in major industrial countries, their effects spread to almost all countries with which they have trade relations. Often the rise in the price of a basic raw material like petrol in the international market leads to rise in the prices of all related commodities in a country.