what are menu costs 
menu costs are a type of transaction cost incurred by firms when they change their prices menu costs are one microeconomic explanation offered by new keynesian economists for macroeconomic price stickiness which may cause an economy to fail to adjust to changing macroeconomic conditions understanding menu costsmenu costs are the costs incurred by a business when it changes the prices it offers to its customers a classic example is a restaurant that has to physically print new menus when it changes the prices of its dishes the main takeaway from menu costs is that some prices are sticky 1 that is firms are hesitant to change their prices until there is a sufficient disparity between the firm s current price and the equilibrium market price to justify the expense of incurring the menu cost for example a restaurant should not change its prices until the price change will result in sufficient additional revenue to cover the cost of printing new menus in practice however it may be difficult to determine the equilibrium market price or to account for all menu costs so it is hard for firms and consumers to behave precisely in this manner history of the menu costs conceptthe concept of menu costs was originally introduced by economists eytan sheshinski and yoram weiss in 1977 sheshinski and yoram argued that in an inflationary environment the prices firms charge will not rise continuously but in repeated discrete jumps that occur when the expected increase in revenue justifies incurring the fixed cost of changing the price 2new keynesian economists later applied the argument as a general theory of nominal price rigidity economists used it as an explanation for price stickiness and its role in propagating macroeconomic fluctuations the most direct application was a 1985 paper by gregory mankiw who argued that even small menu costs could produce enough price rigidity to have a major macroeconomic impact 3george akerlof and janet yellen put forward the idea that firms will not want to change their prices due to bounded rationality unless the benefit is more than a small amount this bounded rationality leads to inertia in nominal prices and wages which can cause output to fluctuate at constant nominal prices and wages 4the influence of menu costs on industry