Menu costs are the costs incurred by a business when it changes the prices it offers to its customers. A classic example is a restaurant that has to physically print new menus when it changes the prices of its dishes.
The concept is used by Keynesian economists to explain the social cost of inflation. He refers by the term- restaurant has to change prices if inflation exist in the economy. And frequent changing of menu card incurs printing cost. However, Keynesian has used it metaphorically to explain all the opportunity cost incurs in case of inflation or hyper-inflation.
The concept of menu costs was originally introduced by economists Eytan Sheshinski and Yoram Weiss in 1977. Sheshinski and Yoram argued that in an inflationary environment, the prices firms charge will not rise continuously but in repeated, discrete jumps that occur when the expected increase in revenue justifies incurring the fixed cost of changing the price.
New Keynesian economists later applied the argument as a general theory of nominal price rigidity. Economists used it as an explanation for price-stickiness and its role in propagating macroeconomic fluctuations. The most direct application was a 1985 paper by Gregory Mankiw, who argued that even small menu costs could produce enough price rigidity to have a major macroeconomic impact
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