Question

Explain what economists mean by “menu costs.”

Short answer

Menu costs are the costs incurred by a firm when it alters the prices it presents to its customers.

Step-by-step solution

Different types of costs

There are different types of costs that firms must pay.

A variable cost is a corporate expense that varies in proportion to how much a firm produces or sells. Fixed costs are expenses that do not vary when sales or production volumes rise or fall.

Explanation

This name comes from the restaurant industry.

When restaurants change their menus, they have to pay the costs of printing new menus.

Economists, however, use this as an expression that refers to any changes in nominal prices.

It also concerned with the effect that price-changing has on customers. A menu cost is a cost that a firm has when changing its prices.