Explain the concept of cost-push inflation in aggregate demand and supply.

Cost-push inflation refers to a situation in which the overall price level in an economy rises due to an increase in production costs. It occurs when there is a decrease in aggregate supply (AS) caused by an increase in the cost of production inputs, such as labor, raw materials, or energy.

In the context of aggregate demand and supply, cost-push inflation can be explained as follows:

1. Increase in Production Costs: When the cost of production inputs rises, businesses face higher expenses to produce goods and services. This can be due to factors such as an increase in wages, higher taxes, or a rise in the price of imported raw materials.

2. Decrease in Aggregate Supply: As production costs increase, businesses may reduce their level of output or supply less quantity of goods and services at the existing price level. This leads to a leftward shift of the aggregate supply curve (AS), indicating a decrease in the overall supply of goods and services in the economy.

3. Higher Prices: With a decrease in aggregate supply, the economy experiences a shortage of goods and services relative to the demand. As a result, prices start to rise. This is because businesses can now charge higher prices to cover their increased production costs and maintain profitability.

4. Reduced Real Output: As prices rise, consumers' purchasing power decreases, leading to a decline in real output or the quantity of goods and services produced. This is because consumers may reduce their consumption due to the higher prices, resulting in a decrease in aggregate demand (AD).

5. Inflationary Spiral: Cost-push inflation can lead to a vicious cycle known as an inflationary spiral. As prices rise, workers may demand higher wages to maintain their purchasing power, further increasing production costs. This, in turn, leads to another round of price increases, creating a self-reinforcing cycle of inflation.

Overall, cost-push inflation in aggregate demand and supply occurs when an increase in production costs reduces aggregate supply, leading to higher prices and a decrease in real output. It highlights the interplay between the cost of production and the overall price level in an economy.