Reasons for wage and price stickiness
Menu costs and aggregated demand externalities
These are costs incurred by firms when changing prices such as updating menus and sending them to customers, coming up with immature price lists and distri aloneing them to sales staff. As a result of these costs, firms break down reluctant to smorgasbord their prices as it will be high-priced to constantly change prices and hence rigidity in changing of prices. Also when firms reduce prices, that does not benefit it only but extend to the other firms. A reduction in prices of commodities increases the get power of customers and increase demand for all firms. To this, firms escape the office of incurring menu costs and instead they only fetch more to increase revenue rather than reducing prices. This is know as aggregate demand externalities.
The staggering of prices
Since prices are prune by different people in the economy and at different times, adjusting of prices by firms in the economy is staggered.
Staggering makes it elusive for firms to set prices since firms care about their prices relative to prices of other firms. If a firm sets a higher price relative to its enemys, it may lose some of its customers so the firms is forced to compute the competitors prices before it sets a new price. Staggering makes the boilers suit level of prices to adjust slowly even when individual prices change frequently.
Coordination failure
The New Keynesian economists suggest that price and wage stickiness is as a result of coordination failure in the economy. Coordination problems can splay in the setting of wages and prices because price setters must consider the actions of other price and wage setters...If you want to get a full essay, order it on our website: Ordercustompaper.com
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