Why does inflation occur? To an outsider, inflation appears somewhat mysterious. Is there an extremely simple mathematical model where inflation naturally occurs? I would like something that even someone with zero understanding of economics can appreciate.

UPDATE: I am hoping to find an agent-based model which is not defined in terms of inflation, but in terms of more basic (to me) things like supply, demand, et cetera, but where inflation occurs. For example, the agents' goal could be to optimize revenue and they could have a limited set of possible actions. Iterating their decisions could then lead to inflation. Maybe such a model is nonsense, but I'd imagine that if it is not there would be papers about it.

  • $\begingroup$ Sure! If the everyone raises the price of whatever it is that they are selling by 10% every year, inflation naturally occurs. In case this 'model' does not satisfy you you should probably elaborate on your exact expectations and what you mean by "naturally". $\endgroup$ – Giskard Jun 21 '16 at 17:48
  • $\begingroup$ Thanks for this first answer. Why should those people increase price? Price -- according to my very limited knowledge in the area -- is something like the intersection of supply and demand. Perhaps my hope is naive, but I would like a model consisting of agents who behave according to very simple rules, but where still price is obtained as some sort of equilibrium, and where we can see that inflation occurs over time. (I'd imagine that are many such models, but it is hard for a non-expert to find them.) $\endgroup$ – Manu Jun 21 '16 at 20:14

Quoting Wikipedia:

the quantity theory of money (QTM) states that money supply has a direct, proportional relationship with the price level.

According to this theory an increase in money in circulation increases price levels.

So an "extremely simple mathematical model" (and extremely simplistic) would be something like:

$$ \pi_t = \dfrac{M_t-M_{t-1}}{M_t} $$ where $M$ stands for money supply and $\pi$ stands for inflation.

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  • $\begingroup$ Thanks for the reply. I have reformulated my question to try to be more precise about what I am trying to find out. $\endgroup$ – Manu Jun 24 '16 at 18:49

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