The sticky wage theory is the belief that wages are slow to adjust to changes in economic conditions. This theory suggests that employers are reluctant to lower wages in a down economy, and workers are reluctant to accept lower wages. As a result, wages can remain “sticky” or slow to adjust, which can lead to unemployment. Why prices are sticky in oligopoly? There are a few reasons prices are sticky in oligopoly:
1. The most dominant firms in the market tend to set prices, and these firms have an incentive to keep prices high in order to maximize profits.
2. There is a lack of competition in oligopolies, which gives firms more power to set and maintain high prices.
3. Firms in oligopolies are often interdependent, meaning that they must take into account the reactions of their competitors when making pricing decisions. This makes it difficult to lower prices without triggering a price war.
4. Prices may be sticky due to government regulation or other factors outside of the firms' control.
What does sticky inflation mean?
Sticky inflation is a term that is used to describe a situation in which prices for goods and services tend to remain relatively stable over time, even as the overall level of prices in the economy (as measured by the inflation rate) rises or falls.
In other words, sticky inflation occurs when the prices of individual goods and services do not change very much in response to changes in the overall inflation rate. This can be contrasted with "flexible" or "responsive" prices, which would change more in response to changes in the inflation rate.
There are a number of factors that can contribute to sticky inflation, including:
- Expectations: If people expect prices to rise in the future, they may be less likely to purchase goods and services in the present, which can help to keep prices stable.
- Contracts: Some prices may be set in contracts (e.g. employment contracts, leases, etc.), which can limit how much they can change in response to changes in the inflation rate.
- Menu costs: It can cost businesses money to change prices (e.g. printing new menus, changing prices on websites, etc.), which can discourage them from doing so frequently.
- Mental accounting: People tend to think of prices in terms of "mental reference points" (e.g. $100 is a lot more than $10, but not much more than $1,000), which can make them resistant to small changes in prices.
All of these factors can contribute to sticky inflation, which can make it difficult for the overall level of prices in the economy to adjust quickly to changes in demand or other economic conditions.
What is the difference between sticky prices and flexible prices?
Sticky prices are prices that are slow to adjust to changes in market conditions. This can happen for a variety of reasons, including menu costs (the costs associated with changing prices), information asymmetries (when one party has more information than the other), and nominal rigidities (when contracts or other commitments are denominated in nominal terms).
Flexible prices are prices that adjust quickly to changes in market conditions. This is typically the result of competition among firms.
Why do sticky wages and prices increase the impact of an economic downturn on unemployment and recession?
In an economic downturn, firms are typically reluctant to reduce wages and prices because they fear that this will further reduce demand and lead to even more job losses. This means that the impact of an economic downturn on unemployment and recession is amplified.
What did Keynes mean by sticky price?
Keynesian economics argues that prices are sticky, meaning that they do not change immediately or uniformly in response to changes in economic conditions. This stickiness means that prices can act as a brake on the economy, slowing down economic growth.