Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Pulling apart why prices can be sticky

Saying that prices are sticky in the short run is all very well, of course, but what causes them to be so? The answer to this question is important, because without sticky prices output would always be at its natural level .

Economists have come up with a number of theories to explain this stickiness of prices; in other words, the upward-sloping SRAS curve.

Some firms are just slow to adjust prices

Adjusting prices isn’t a costless activity for firms. At a basic level, going round updating all the prices in your store regularly is likely to be expensive and not a particularly good use of time. This is especially true when the required increase in price is small.

These so-called menu costs are likely to differ between firms:


For firms that need physically to change each price manually, such as a local corner shop, menu costs are likely to be relatively high.


For large online retailers with sophisticated automated systems, menu costs are likely to be small.

If only a few firms change their prices in the short run, on average the price level doesn’t increase by much. At the same time, those firms that have sticky prices and haven’t changed their price are now relatively underpricing their goods compared to the ‘true’ market price. This results in an increase in demand from households and firms for the underpriced goods.

Another reason for sticky prices is that most contracts are written using the nominal price. For example, if a consumer has signed a contract with a firm that promises to provide some service over the year at a certain (nominal) price, he expects that price to be honoured even if an increase in AD means that the price should increase.

Also, evidence suggests that some industries are slow to change prices even when doing so would seem relatively easy. The newspaper/magazine industry is a good example. It often keeps prices unchanged for years even though changing cover prices of newspapers and magazines would be relatively easy.