Price Stickiness Flashcards
1
Q
Demand shocks under flexible prices
A
large effect on prices, small effect on quantities
negative demand shocks lead to firms EITHER firing workers OR cutting prices
firm operates where MR=MC
2
Q
Demand shocks under sticky prices
A
small effect on prices, large effect on quantities
supply is determined by demand so firms respond to changes in demand by supplying larger/smaller quantities
3
Q
Prices are sticky because
A
consumer reaction (fear of consumers going to another firm may lead to inertia because no firm wants to be the first to raise prices)
wage rigidity (salaries are fixed for long periods)
information costs (cost of finding out what price they should use)
menu costs (cost of reprinting menus/signs)
