Sticky prices.
In plain English
Prices are sticky because changing them costs something: reprinting menus, renegotiating contracts, annoying customers, and reopening wage agreements. Wages are especially sticky downward, since employers cut headcount before they cut pay. This stickiness is the reason the short-run aggregate supply curve slopes up rather than standing vertical. It is also why monetary policy can affect real output at all, because if every price adjusted instantly, changing the money supply would only change the price level. Over long horizons prices do adjust, which is why the effects fade.
01Why it matters
Sticky wages are why recessions produce layoffs instead of across-the-board pay cuts, which concentrates the damage on a smaller group of people rather than spreading it thin.
02The math, step by step
Demand for a restaurant's meals falls 15 percent. Rather than cut menu prices immediately, the owner keeps prices and cuts two shifts. Output and hours fall right away. The menu might not change for another year.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Sticky does not mean fixed. Prices do move, just slower than conditions do. It is also not about sellers refusing to lower prices out of greed. The friction comes from contracts, menu costs, and the risk of upsetting long-term customers.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice