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

Commercial banks, Commercial Banks A Commercial Bank is a financial in...

Commercial Banks A Commercial Bank is a financial institution which undertakes all kinds of ordinary banking business like accepting deposits, advancing loans and is a member

Illustrate about forecasting in management, Illustrate about forecasting in...

Illustrate about forecasting in management A forecast expert has been asked to provide quarterly estimates of the sales volume for a specific product for the next four quarters

Price elasticity of demand, Price Elasticity of Demand Is the respons...

Price Elasticity of Demand Is the responsiveness of the quantity demanded to changes in price; its co-efficient is Pe d    =  Proportionate change in quantity demanded

Determine the theory of consumer behaviour, Theory of consumer behaviour ...

Theory of consumer behaviour The role of customers in an economy is of significant importance because consumers spend most of their incomes on services and goods produced by fi

Marginal cost, Marginal Cost This is the increase in total...

Marginal Cost This is the increase in total cost resulting from the production of an extra unit of output.  Thus, if TC n   is the total cost of producing n

Calculate the equal amounts of capital and labor, The production function o...

The production function of the personal computers for DISK Company is given by Q = 10 KL where Q is the number of computers produced per day, K s the hours of machine time,

Apprehensions about the future price of law of demand, Apprehensions about ...

Apprehensions about the future price of law of demand When consumers anticipate a constant rise in the price of a long-lasting commodity, they buy more of it despite the price

Explain the dilemma of the monetary agent, Problem 1: (a) Distinguish ...

Problem 1: (a) Distinguish between political and partisan monetary cycles on inflation and unemployment rates. (b) In the rule versus discretion literature, explain how dy

Features of planned economy, Features of Planned Economy The command e...

Features of Planned Economy The command economies relies exclusively on the state.  The government will decide what is made, how it is made, how much is made and how distribut

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