My description on inflation - correct?

Economics Economics Questions
1

Any suggestions in improving this?

What is inflation?

Modern economists, with the exception of the Austrian school, use the word inflation to describe a general increase of prices in the economy. This is true, but logically backwards. Suppose there is a boat marina with lots of pylons at the edge of a lake. Suppose, now, that the level of the lake falls. Today’s economists would say there was a general increase in the length of the pylons sticking out of the water.

Inflation is an increase in the money supply – that is, the total amount of money “Chasing” the total amount of goods and services in an economy. The increase in money means each dollar is worth less and consequently, prices rise. To illustrate this, suppose there are 10 people in a room, each with $1. The total money supply is $10. A farmer comes in with 10 grapefruit. In this very simplistic example, a grapefruit might cost $1. Suppose now that everyone is handed an additional dollar such that everyone has $2. A single grapefruit would now cost $2.

Money typically enters the economy through direct loans to large banks and investors (the very rich) and social security and public assistance checks (the very poor). In the case of our grapefruit, if one person was given an additional dollar in advance of the rest, he could still buy grapefruit for $1 each, and buy two of them. The very last to receive the additional dollar would at least have to pay $2, but on the other hand, there may not be a grapefruit left for him.

The grapefruit farmer may see that grapefruit are selling much faster, and double his production. He will take out loans to plant an extra orchard and hire more workers with the expectation of this trend continuing. Eventually though, he will see that he is still only able to sell 10 grapefruit on each trip to the room. He is unable to pay off his loan because he was led to make a bad calculation by inflation – the increase in the money supply.

2

Your understanding of what inflation is, and it’s effects is right.

But try elaborating more on it’s effects on the production process. I don’t thiink it is gonna make the producer err badly. The producer who receives the money first(from the first consumer who received cash from the banks) will bid up a greater quantity of raw materials required, at the cost of the other marginal producers. But this doesn’t mean he is gonna make losses. The only thing is that, producer(who first receives the inflated money from the consumer) gains a better share of the market at the cost of some marginal producer. A kind of redistribution.

3

I would think he should just generalize his definition to show money increases are non neutral, so technically the grapefruit won’t cost 2 bucks after the increase in the group’s money supply. That would cover the effects on production as well as others, like drops in demand for goods aimed at fixed income receivers, which he could elaborate on later. Pushing the effects on production kind of takes it away from a definition of inflation and moves it more toward an explanation of the business cycle.

4

Thank you for the input and ideas. Time to read more.