Question

Discuss potential reasons for price stickiness.

Answer 1

In view of the claims regarding nominal wage stickiness, the rigidity of certain costs is easier to understand. Because wages are a major component of the total cost of doing business, wage stickiness can lead to stickiness of the production price. With nominal salaries steady, at least some businesses will be able to take a "wait and see" approach before changing their rates. During this process, they will analyze details about whether profits are rising or declining, and seek to determine the possible responses of customers or rival firms in the industry to any price increases they might make

Meanwhile, businesses may choose to change production and jobs in reaction to changing market conditions, leaving the price of the commodity alone. Quantity modifications have consequences, but the resulting risks can be considered to be less than those resulting with demand changes.Another potential reason for price stickiness is the fact that there are cost of transition involved with demand shifts. For certain cases, businesses are forced to print new product lists and catalogues, and inform consumers about price changes. Too much doing so could jeopardize customer relations.