Explain what economists mean by "menu costs."

Menu costs refer to the costs incurred by a firm when it has to adjust its prices. These costs are associated with the time, effort, and resources required to change and communicate the new prices to customers.

In a brick-and-mortar store, menu costs may include the time and effort required to print and distribute new catalogs or menus, redesign price tags, train employees on the new prices, and inform customers about the changes. In an online environment, menu costs may include the costs of updating a website, changing advertisements, and notifying customers via email or social media.

Menu costs are important because they can affect a firm's pricing decisions and overall profitability. Since changing prices can be costly, a firm may be hesitant to do so frequently. This can result in firms being slower to adjust their prices in response to changes in demand, costs, or market conditions, which may put them at a competitive disadvantage or, conversely, lead to higher profits if they can maintain higher prices for longer.

For individual firms, menu costs can be considered a type of friction that impairs the ability to quickly and efficiently adjust prices. This can result in less efficient allocation of resources within the firm, which may in turn affect its profitability and competitiveness. At the macroeconomic level, a higher prevalence of menu costs can contribute to price stickiness – a situation where prices do not adjust quickly to changing market conditions, potentially leading to inefficient resource allocation in the economy and influencing the effectiveness of monetary and fiscal policies. In conclusion, menu costs are the costs firms incur when changing their prices and can have significant consequences on both the firm's decisions and broader economic outcomes. Understanding menu costs helps economists explain pricing behavior and the effects of different policies on firms and the overall economy.