Menu costs, Managerial Economics

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.    

Posted Date: 10/26/2012 6:35:04 AM | Location : United States







Related Discussions:- Menu costs, Assignment Help, Ask Question on Menu costs, Get Answer, Expert's Help, Menu costs Discussions

Write discussion on Menu costs
Your posts are moderated
Related Questions
Shifts in the supply curve Shifts in the supply curve are brought about by changes in factors other than the price of the commodity. A shift in supply is indicated by an entir


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

Another vital relationship that is often referred to in economic analysis is the relationship between consumption expenditure andprice elasticity. From the law of demand, we know t

Write about International economic integration of the Republic of Moldova

Perfect Competition   The model of perfect competition describes a market situation in which there are: i.         Many buyers and sellers to the extent that the supply of

Measuring Point Elasticity on a Non-linear Demand Curve Let's now explain the method of measuring point elasticity on a non-linear demand curve. Assume we want to measure the


Q. Show Normal profit equilibrium? Normal Profits: With the condition of  MC = MR and MC cuts the MR from below, if E is the point of stable equilibrium, output of firm is OM

Goverment Banker, Fiscal Agent and Adviser Central banks in all countries acts as the fiscal agent, banker and adviser on all important financial matters to government of thei