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

Traditional theoretical concepts to business behaviour, Traditional theoret...

Traditional theoretical concepts to actual business behaviour Accommodating traditional theoretical concepts to actual business behaviour and conditions: Managerial economic

Full-service department, Like supermarkets, full-service department stores ...

Like supermarkets, full-service department stores like Macy's are mainly in decline. What factors may these types of stores have in common behind their declines? How would you veri

Economic theory, How does economic theory contribute to managerial decision...

How does economic theory contribute to managerial decisions?

Appropriate management of sales, Appropriate Management of Sales: Demand f...

Appropriate Management of Sales: Demand forecasts are made area wise and after that sales targets for various areas are set in view of that. This helps the calculation of sales pe

Characteristics of money, Characteristics of Money Over time, therefor...

Characteristics of Money Over time, therefore, it became clear that for an item to act as money it must possess the following characteristics. Acceptability If

Write the techniques of managerial economics, Techniques of Managerial Econ...

Techniques of Managerial Economics Managerial economics draws on a wide range of economic tools, concepts and techniques in decision-making process. These concepts can be cons

Disposable income, Disposable Income This is the income which househol...

Disposable Income This is the income which households actually have available to spend or to save.  To calculate disposal income, which is indicated by Ya, the statistician mu

Describe the managerial decisions, Describe the Managerial decisions Ma...

Describe the Managerial decisions Managerial decisions are an important component in the working wheel of an organisation. The failure or success of a business depends upon the

Price discrimination, Let there be two consumers A and B, each buying at mo...

Let there be two consumers A and B, each buying at most two units of a good. A values having one unit at £10 and having two units at £12 whereas B values having one unit at £8 and

cost pricing and marginal cost pricing method, Discuss the full cost prici...

Discuss the full cost pricing and marginal cost pricing method. Explain how the two  methods differ from each other.

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