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

Why does the demand curve slope downwards, Why does the demand curve slope ...

Why does the demand curve slope downwards? As Figure above demonstrates, demand curve slopes downward to the right. Downward slope of the demand curve reads the law of demand i

Controlover supply of inputs - sources of monopoly, Q. Controlover Supply o...

Q. Controlover Supply of Inputs - sources of monopoly? Furthermore, a monopoly situation may arise because of control over the supply of an essential input -skilled labour, raw

Central bank functions-lender of last resort, Lender of Last Resort The...

Lender of Last Resort The central bank also acts as the lender of last resort. Historically, this function developed out of the special position of the central banks. The centr

Implications for the shape of cost function, Q. Implications for the shape ...

Q. Implications for the shape of cost function? A cost function is also a mathematical relationship, one which relates the expenses an organisation incurs on the quantity of ou

Basis of wage claims, The Basis of Wage Claims The union's demand for ...

The Basis of Wage Claims The union's demand for higher wages is normally based  on one or more of the following four arguments: 1. The cost of living argument This is

Stakeholders, The following represents the section headers you should consi...

The following represents the section headers you should consider for your reasoned document.   Each section should have (at least) two research citations to support your work :

Firm's short-run elasticity, A firm's technology needsit to combine 5 pers...

A firm's technology needsit to combine 5 person-hours of labor with 3 machine-hours to make 1 unit of output. The firm has 15 machines in place and the wage rate rises from $10 per

Interest rates, Interest rates Decreasing the rate of interest may...

Interest rates Decreasing the rate of interest may not encourage investment but increasing the interest rate tends to lock up liquidity in the financial system.

Optimum combination of resources, Optimum combination of resources The...

Optimum combination of resources The firm can maximise output given costs.  That is when the entrepreneur attains the highest isoquant given a particular Isocost. At t

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