When price level increases, why input prices are sticky in short run?

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Expert Solution

When there is an increase in the price level in the economy, input prices are sticky in the short run. This is because input prices are difficult to adjust in the short run which means input prices are sticky in the short run but can be changed in the long run. Thus input prices do not react instantly with the change in prices in the economy.

Suppose the price of good increases, the supplier could benefit that situation by hiring more factors of production and increasing its production level. But he cannot act on it instantly as the input prices remain sticky in the short run. That is why we see unbalanced demand and supply in the short run when there are changes in some macroeconomic factors like the price level of the economy.

It is more flexible to hire more factors in the long run than in the short run which makes the input prices in the short run sticky and that's why make it harder to react to the changes in the price level.

Rahul Sunny answered 1 year ago

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