Sticky Prices: Definition, Theory & Model Video

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  • 0:01 Sticky Prices &…
  • 0:51 Short Term Aggregate Supply
  • 1:54 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Prices can be sticky, and that can explain aggregate supply in the short term in an economy. In this lesson, you'll learn about sticky price theory and how it tries to explain short term aggregate supply. A short quiz follows the lesson.

Sticky Prices and Aggregate Supply

Sticky prices are prices that do not adjust immediately to changing economic conditions.

Aggregate supply is the total quantity of goods and services produced in an economy at a particular point in time. If you plot the quantity of goods and services supplied in an economy at a particular price level and connect the dots, you'll see what is called an aggregate supply curve. In the long run, an aggregate supply curve is vertical because the quantity supplied does not depend on price level. Instead, the quantity supplied is based on the productive capacity of an economy - its labor, land, capital, and other factors of production. However, in the short run, the aggregate demand curve is upward sloping. The theory of sticky prices attempts to explain why the aggregate supply curve is upward sloping in the short run.

Short-Term Aggregate Supply

Some economists argue that the aggregate supply curve is upward sloping in the short term because of sticky prices. As we discussed, a sticky price is the tendency of the price for a certain good or service to not respond instantly to changes in the economic situation. Part of the slow response is due to menu costs, which are costs related to changing prices. Menu costs can include such things as printing costs, distribution costs, and the time and labor required to change price tags.

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