Stickiness

What is Stickiness in Economics?

Stickiness is a term used in economics to describe the resistance of prices and wages to adjust downwards despite changes in market supply and demand. This phenomenon is particularly notable in labor markets, where wages often do not fall even in the face of high unemployment or reduced demand for labor. Similarly, prices of goods and services can be sticky, often remaining unchanged despite fluctuations in supply and demand.

Key Points:

Sticky Prices: Prices that do not adjust quickly in response to changes in supply and demand.
Sticky Wages: Wages that remain stable despite changes in labor market conditions.
Downward Stickiness: The specific scenario where prices and wages resist moving downward.
Factors Influencing Stickiness: Long-term contracts, menu costs, and psychological factors.

Examples of Stickiness

Wage Stickiness: A company might avoid lowering wages during an economic downturn to maintain employee morale and prevent turnover, even if current wages are above market levels.
Price Stickiness: A restaurant may not reduce menu prices even if ingredient costs drop, to avoid the costs associated with updating menus and potential confusion among customers.
Sticky Inflation: During periods of inflation, prices may increase quickly, but when inflation slows, prices may remain high, reflecting resistance to downward adjustments.

Frequently Asked Questions (FAQs)

Why do wages tend to be sticky downward?

Wages tend to be sticky downward due to factors such as long-term employment contracts, the cost of hiring and training new staff, and the negative impact on employee morale and productivity that wage cuts can create.

Menu costs refer to the expenses incurred by firms to change prices, such as the cost of printing new menus, updating computer systems, and informing customers. These costs can make firms reluctant to adjust prices frequently.

How does the ratchet effect relate to stickiness?

The ratchet effect describes a situation where economic variables, such as prices or wages, move more easily upward than downward. This effect contributes to stickiness as it makes decreases in prices or wages less likely once they have been increased.

Can stickiness affect economic growth?

Yes, stickiness can affect economic growth by slowing the adjustments needed to reach an equilibrium. If prices or wages cannot fall in response to reduced demand, it can lead to prolonged periods of high unemployment or lower economic output.

Menu Costs: The costs associated with changing prices, which can discourage firms from adjusting prices frequently.
Ratchet Effect: The tendency for economic variables to move more easily in one direction (usually upwards) than in the opposite direction, contributing to stickiness.
Nominal Rigidity: A broader term encompassing both price and wage stickiness, referring to the resistance to changes in nominal values.
Real Wage: The wage of an employee adjusted for inflation, which can remain high due to downward wage stickiness.

Suggested Online Resources

Recommended Books for Further Study

“Macroeconomics” by N. Gregory Mankiw - Offers insights into various macroeconomic phenomena, including price and wage stickiness.
“The General Theory of Employment, Interest, and Money” by John Maynard Keynes - Explores foundational concepts in macroeconomics and addresses issues of economic stickiness.
“Principles of Macroeconomics” by Robert H. Frank and Ben S. Bernanke - Discusses fundamental principles of macroeconomics with a focus on market dynamics and economic resilience.

Accounting Basics: “Stickiness” Fundamentals Quiz

### What does 'stickiness' in an economic context commonly refer to? - [ ] The increase of supply in markets - [ ] The rise in demand for luxury goods - [x] The resistance to adjust prices and wages downward - [ ] The elasticity of supply and demand > **Explanation:** Stickiness in economics typically refers to the resistance of prices and wages to adjust downward even when economic conditions suggest they should. ### What are 'menu costs' in the context of sticky prices? - [ ] Costs related to marketing expenses - [x] Costs associated with changing prices - [ ] Costs of cooking different dishes - [ ] Costs of labor in restaurants > **Explanation:** Menu costs are the expenses firms face when changing prices, such as printing new menus, updating systems, and alerting customers, which can contribe to price stickiness. ### Which term is often used to describe wages that do not decrease easily? - [ ] Liquid Wages - [x] Sticky Wages - [ ] Floating Wages - [ ] Augmented Wages > **Explanation:** Wages that do not easily decrease even when there is downward pressure on the labor market are referred to as "sticky wages." ### What psychological factor may prevent companies from reducing wages? - [ ] Customer preferences - [ ] Market competition - [x] Employee morale - [ ] Regulatory impact > **Explanation:** The reduction of wages can negatively impact employee morale, making companies reluctant to lower pay even when market conditions warrant it. ### What effect helps explain why prices and wages are more easily increased than decreased? - [ ] Substitution Effect - [ ] Income Effect - [ ] Demand-pull Effect - [x] Ratchet Effect > **Explanation:** The ratchet effect describes the tendency for prices and wages to rise more easily than fall, contributing to economic stickiness. ### When prices do not promptly respond to changes in supply and demand, this condition reflects what? - [ ] Economic equilibrium - [ ] Hyperinflation - [ ] Perfect competition - [x] Price Stickiness > **Explanation:** Price stickiness is when prices do not adjust promptly in response to changes in supply and demand. ### How do long-term contracts contribute to wage stickiness? - [x] They fix wages for the contract’s duration, making it hard to adjust downward - [ ] They make it harder to hire new employees - [ ] They reduce productivity requirements - [ ] They increase wage flexibility > **Explanation:** Long-term contracts often fix wages for the duration of the agreement, making it difficult to reduce wages even if economic conditions change. ### What can stickiness in wages lead to during a recession? - [ ] Lower unemployment rates - [ ] Increased economic growth - [x] Prolonged unemployment - [ ] Higher consumer spending > **Explanation:** Stickiness in wages can lead to prolonged unemployment during a recession as wages do not adjust downward to balance the supply and demand for labor. ### What is another term that encompasses both price and wage stickiness? - [ ] Real Rigidity - [x] Nominal Rigidity - [ ] Fiscal Rigidity - [ ] Supply Rigidity > **Explanation:** Nominal rigidity refers broadly to the resistance to adjustments in nominal values such as prices and wages. ### One reason companies might refrain from cutting prices despite reduced costs is due to: - [ ] Increased competition - [ ] Supply chain disruptions - [x] Menu Costs - [ ] Overproduction > **Explanation:** Companies might refrain from cutting prices despite reduced costs because of menu costs, the costs associated with updating prices and informing consumers.

Thank you for embarking on this journey through the comprehensive understanding of economic stickiness and tackling our challenging quiz questions. Keep advancing your knowledge in this integral aspect of economics!