What is Wage and Price Stickiness? 

Keynes also pointed out that although AD fluctuated, prices and wages did not immediately respond as economists often expected. Instead, prices and wages are “sticky,” making it difficult to restore the economy to full employment and potential GDP.

What is Price Stickiness?

The concept of stickiness refers to a situation where something does not change. Price stickiness, also known as nominal rigidity refers to a situation in which price does not change for a good or service despite changes in market demand or costs of production.

How is Price Stickiness Used?

Principles of economics dictate that demand for a good or service will fall as prices rise, and demand will rise as prices fall. As such, firms generally raise prices as demand rises and lower prices as demand falls. Firms also tend to raise prices when the cost of inputs rise. When a good or service is price sticky, the price of the good does not follow these economic patterns. The price remains constant despite greater or lower demand or changes in costs of inputs. This can be because firms are unwilling or unable to change the prices based upon other factors relevant to the product or service. This might be common in regulated industries, long-term contracts, or in markets where substitute goods or services have a strong effect on price. Price stickiness is commonly understood to be an indicator of market inefficiencies. When principles of price relationship to supply and demand do not hold true, the result is market disequilibrium. Price stickiness can occur in situations that would result in a rise or reduction in price. Failure of the price to rise as expected is known as sticky up. Failure of a price to go down as expected is known as sticky down. Sticky up often results in excess demand at a given price. Sticky down often results in excess supply at a given price (as demand has gone down).

Related Topics

• Keynesian Perspective of Aggregate Demand
• Recessionary and Inflationary Gap
• Consumption Expenditure
• Investment Expenditure
• Government Spending in Aggregate Demand
• Net Exports in Aggregate Demand
• Keynesian Economic Analysis
• Wage and Price Stickiness 
• Coordination Argument of Wage Stickiness
• What are Menu Costs
• Keynesian Assumptions in the Aggregate Demand and Aggregate Supply Model
• Macroeconomic Externality
• Expenditure Multiplier
• The Phillips Curve
• Keynesian Approach to Unemployment and Inflation
• Keynesian Perspective on Market Forces
• NeoClassical Economics
• Long Run Potential GDP
• Physical Capital Affects Productivity
• Potential GDP in the Aggregate Demand Aggregate Supply Model
• Prices are Flexible in the Long Run
• Keynesian and NeoClassical View of Long-Run Aggregate Supply and Demand
• Speed of Macroeconomic Adjustment of Wages and Prices
• Paradox of Rationality
• Rational Expectations Theory
• Shapley Value
• Mechanism Design Theory
• What is the Adaptive Expectations Theory
• Measure Inflation Expectations
• Neoclassical Phillips Curve Tradeoff
• Neoclassical View of Unemployment
• Neoclassical View of Recessions
• Keynesian vs Neoclassical Macroeconomic Policy Recommendations