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

Brief note, principles of time perspectives

principles of time perspectives

Model specification - search and matching model, Model Specification   ...

Model Specification   We proceed with the model specification in the following steps. 1)  The economy is composed of competitive firms (F  in number) and identical workers

Causes of inflation, Causes of Inflation   At present three main expl...

Causes of Inflation   At present three main explanations are put forward: cost-push, demand-pull, and monetary. Cost-push inflation occurs when he increasing costs of prod

Determinants of money supply, DETERMINANTS OF MONEY SUPPLY The total su...

DETERMINANTS OF MONEY SUPPLY The total supply of nominal money in the economy is determined by the joint behaviour of the central bank which controls the total issue of the hig

Explain discrete-event simulation, Q. Explain Discrete-event simulation? ...

Q. Explain Discrete-event simulation? Discrete-event simulation: Operation of a system is signified as a chronological sequence of events. Every event take place at an instan

Real rigidities in the labour market, Real Rigidities in the Labour Market ...

Real Rigidities in the Labour Market   New Keynesian  theories of the labour market help in explaining  the existence of involuntary unemployment. The theories also attempt to

Describe how commercial banks determine their output, (a) Describe how comm...

(a) Describe how commercial banks determine their output, interest rates and profit levels assuming they act as oligopolies. (b) To what extent is the above statement a reality

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