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Unformatted text preview: Aggregate Supply Equilibrium Analysis Even though sticky prices are in no one’s interest, prices can
be sticky simply because people expect them to be If ﬁrm A expects ﬁrm B to cut prices, it may be optimal for
ﬁrm A to cut prices as well: no recession.
If ﬁrm A expects ﬁrm B to keep prices unchanged, it may be
optimal for ﬁrm A to keep prices unchanged: recession. 2. Staggered prices: price setting is not synchronized, ﬁrms
that raise prices ﬁrst limit the increase to avoid losing market
3. Coordination failure: each ﬁrm’s decision inﬂuences the set
of outcomes available to the other ﬁrm (externalities) 1. Menu Costs : adjusting prices is costly for ﬁrms Why are prices sticky? Reasons for price stickiness Aggregate Demand ...
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- Fall '08