Menu costs, Managerial Economics

Assignment Help:

Menu Costs 

Why do firms not change their prices very  frequently? Obviously, the costs of changing prices at  frequent intervals and in small amounts must be more  than the benefits obtained from such a change. Firms prefer to wait before they make price changes in relatively large amounts and in the mean time absorb the losses that they would  suffer by not changing prices. This of course presumes that the firms  have  some monopolistic price setting power and  the  losses referred to above include lower profits  than would have been possible  if prices had been raised, and not necessarily actual out-of-pocket losses.

It  is  easy to understand  this  behaviour  of monopolistically competitive firms through the example of restaurants competing with each other. The term  'menu costs' immediately becomes meaningful as the costs that would be  incurred  in changing the menu cards every time there  is a change in the prices of items on the menu. These printing costs are surely negligible, but  the more  important costs are in terms of the loss of customers that a firm would face if it subjects its clientele to the 'irritability'  of continuous, small changes in prices. The concept  of menu costs in  a modem economy  is  indeed broad.  It  is  also widely applicable, given  the proliferation of automatic dispensers (e.g., coffee machines) and pay  telephones that operate on coins.  

It  is easy to  imagine  the cost that would be  incurred by  the suppliers if these ubiquitous machines were to be adjusted every time a price change is effected. The firms would rather not change their prices.  It  is  this idea  of weighing  the  costs  of  changing prices against the benefits obtained  from  changing prices that  is  formalised  in  the Mankiw model that we consider below.    


Related Discussions:- Menu costs

What do you mean by market structure, Q. What do you mean by Market Structu...

Q. What do you mean by Market Structure? Market economy pricing is conditioned by market structure. There are various forms of market structures. Perfect competition is accorde

Indifference curves, Indifference curves In order to explain indiffere...

Indifference curves In order to explain indifference curves, we will again make the simplifying assumption that the consumer buys two goods, x and y. The table below gives

What do you mean by kinked isoquant, Q. What do you mean by Kinked Isoquant...

Q. What do you mean by Kinked Isoquant? This isoquant presumes only limited substitutability of labour andcapital. There are just a few processes for generating any one commodi

Explain the leibenstein model, Q. Explain the Leibenstein model? Leiben...

Q. Explain the Leibenstein model? Leibenstein (1966) sees a firm's norms or conventions, dependent on its history of management initiatives, labour relations and other  factors

Quality controls - importance of demand forecast, Quality and Quantity Cont...

Quality and Quantity Controls: Demand forecasting is a necessary and valuable instrument in the control of management of an organisation to provide finished goods of correct quant

Scracity and opportunity cost, Define scarcity and opportunity cost. Show h...

Define scarcity and opportunity cost. Show how these concepts are useful in managerial decision making

Demand curve, Plot the demand schedule and draw the demand curve for the da...

Plot the demand schedule and draw the demand curve for the data given for Marijuana in the caseabove.

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd