MENU COSTS

Most firms do not change the prices of their products every day. Instead, firms often announce prices and leave them unchanged for weeks, months, or even years. One survey found that the typical u.s. firm changes its prices about once a year.

Firms change prices infrequently because there are costs of changing prices. Costs of price adjustment are called menu costs, a term derived from a restaurant’s cost of printing a new menu. Menu costs include the cost of deciding on new prices, the cost of printing new price lists and catalogs, the cos t of sending these new price lists and catalogs to dealers and customers, the cost of advertising the new prices, and even the cost of dealing with customer annoyance over price changes.

Inflation increases the menu costs that firms must bear. In the current U.S. economy, with its low inflation rate, annual price adjustment is an appropriate business strategy for many firms. But when high inflation makes firms’ costs rise rapidly, annual price adjustment is impractical. During hyperinflation, ‘for example, firms must change their prices daily or even more often just to keep up with all the other prices in the economy.