What theory suggests inflation occurs when producers raise prices to meet higher costs?

The Cost-push theory explains that inflation can arise when the costs of production increase, prompting producers to raise their prices in order to maintain their profit margins. This can happen due to various factors such as rising wages, increases in the prices of raw materials, or supply chain disruptions. When these production costs rise, manufacturers often pass these costs onto consumers in the form of higher prices, leading to inflation.

This theory contrasts with Demand-pull theory, which posits that inflation occurs when demand for goods and services exceeds supply, driving prices upward. Government intervention theory focuses on the effects of governmental policies on the economy, while Market equilibrium theory discusses the balance between supply and demand, without specifically addressing the causes of inflation related to production costs. Understanding Cost-push theory is essential for analyzing how external factors can directly affect inflation rates and the overall economy.