Menu costs are the costs faced by firms for desiring to change their prices, whether that be an increase or a decrease. The name “menu cost” stems from the idea that when a restaurant changes its prices, they must reprint their menus and are thus presented with an additional cost. These costs are intangible, and can influence pricing decisions, affect market dynamics, and subsequently contribute to price stickiness in the economy.

In brief, menu costs are the costs experienced by firms when they change prices of goods and services. The name of this phenomenon obviously originated from the cost restaurants faced when having to print new menus when changing prices. Physical resource costs can also be seen in supermarkets who must change price tags when increasing prices, or catalogues needing to be reprinted. However, with the rise of technology and digitalization in today’s markets, these price changes also include the less significant costs of updating websites and software systems. Menu costs are a prevalent set-back to producers of inelastic goods, as they already have less market incentive to change the price points. 

Price stickiness is the idea that producers are generally reluctant to raise or cut prices regardless of market forces. This can be due to various factors, but essentially it is caused by menu costs. Producers of inelastic goods- goods that show a minimal response to price changes- see a revenue fall when they lower their prices, as for this type of goods consumers will be less susceptible to reducing consumption when faced with higher prices. The opposite is true for producers of elastic goods (goods of which consumers are very responsive to price changes). Therefore, menu costs are an additional barrier to changing the costs, and can be used to explain the phenomenon of price stickiness. 

Menu costs are particularly impactful during periods of inflation. Inflation raises price levels and costs, and it forces firms to decide whether they should raise their prices to pass the burden to the consumers or absorb the costs. In theory, firms are generally more likely to raise the prices instead. Unstable inflation causes prices to change continuously, and therefore firms could choose to have their price points lag behind the market in order to reduce menu costs. With the current rise of technology, menu costs have become a less prevalent issue, but are nonetheless present due to the fact consumers can be put off by price volatility and increase consumer uncertainty. 

In conclusion, menu costs are an interesting phenomenon in business economics. They include direct expenses and indirect ones, such as losses in customers. During inflationary periods, menu costs are a particularly important factor to acknowledge as they impact future expectations and therefore economic behaviour of both parties in the market.