Demand pull inflation can be illustrated graphically using aggregate demand and aggregate supply analysis.
Aggregate supply (AS) shows the total supply of goods and services that firms are able to produce at each and every price level. At low levels of output when there is plenty of spare productive capacity, firms can easily expand output to meet increases in demand, resulting in a relatively elastic AS curve.
As the economy approaches full employment (or full capacity), labour and raw material shortages mean that it becomes more difficult for firms to expand production to meet rising demand. As a result, the AS curve becomes more inelastic. When aggregate demand (AD) increases from AD to AD1 the economy is still operating at relatively low levels of capacity. Output can expand relatively easily so firms will only implement small increases in prices from P to P1.
When aggregate demand increases from AD1 to AD2 the economy is moving towards the full employment of factors of production. Many firms choose to increase price to widen profit margins. Shortages of factor inputs mean that the firms' costs of production start to rise. Furthermore, it is likely that, as employment in the economy grows, demand for goods and services will become more inelastic. This will allow firms to pass on large price increases (P1 - P2) without any significant fall in demand.