What are menu costs in simple terms?

Just as a restaurant must reprint its menu to change prices, changing prices takes cost and effort. The concept explains why firms do not immediately change prices when their costs shift a little.

Why are menu costs important in macroeconomics?

If firms do not adjust prices immediately, changes in the money supply or interest rates affect not only prices but also output and employment. Menu costs are therefore a core basis in New Keynesian economics for explaining why monetary policy moves the real economy in the short run.

Menu Costs

📈 Economics By CampusDown Wiki Editorial Team Last updated October 27, 2026

Menu costs are the costs firms incur when changing prices. Named after the cost of reprinting a restaurant menu, they broadly include relabeling, reissuing catalogs, dealing with customers, and gathering information and making decisions about prices. Because of these costs, firms may not change prices immediately when demand or costs shift, producing price stickiness. In New Keynesian economics, menu costs are a core concept explaining why monetary policy affects the real economy in the short run.

Contents

1. Concept and microfoundations
2. Small costs, large business cycles
3. Theoretical debates and empirical research
4. FAQ
5. References

Concept and microfoundations

Sheshinski and Weiss (1977) showed that when price adjustment involves fixed costs, firms facing inflation do not change prices slightly each period but follow an (S, s) rule, adjusting all at once only when the real price leaves a certain band. This became the starting point of state-dependent pricing, in which adjustment is driven by economic conditions rather than time. After the rational expectations revolution of the 1970s, explaining price stickiness as the behavior of rational firms became a task for macroeconomics, and menu costs became a key tool of New Keynesian economics in addressing it. In interviews with U.S. firms, Blinder and colleagues (1998) also found costs of price adjustment among the reasons for price stickiness.

Small costs, large business cycles

Mankiw (1985) and Akerlof and Yellen (1985) noted that under monopolistic competition the profit function is flat near the optimal price, so the loss to an individual firm from not changing its price is very small. A small menu cost can therefore make it rational for a firm to leave its price unchanged, yet if all firms do so the effects on aggregate output and welfare can be large. Blanchard and Kiyotaki (1987) analyzed the economy-wide externalities of such decisions under monopolistic competition, and Ball and Romer (1990) showed that with real rigidities, small nominal frictions can greatly amplify monetary non-neutrality. This work fed into the microfoundations of the Phillips curve and the analysis of monetary policy effects.

Theoretical debates and empirical research

Caplin and Spulber (1987) showed that in a state-dependent pricing model under certain conditions, money may not affect aggregate output even though individual prices are sticky. Golosov and Lucas (2007) likewise reported that when menu cost models are fitted to micro data, a selection effect, in which firms with large desired price changes adjust first, shrinks the real effects of monetary shocks. Nakamura and Steinsson (2008), however, set out five facts about prices, including that regular prices excluding temporary sales change less often than thought, and Midrigan (2011) showed that accounting for the menu cost structure of multiproduct firms restores larger real effects of monetary shocks. Levy and colleagues (1997) measured actual menu costs at large U.S. supermarket chains at about 0.7% of revenue, and Bils and Klenow (2004) reported from U.S. consumer price data that prices change more frequently on average than often assumed. This research forms an important strand of microfounded macroeconomic modeling after the Lucas critique.

FAQ

What are menu costs in simple terms?: Just as a restaurant must reprint its menu to change prices, changing prices takes cost and effort. The concept explains why firms do not immediately change prices when their costs shift a little.
Why are menu costs important in macroeconomics?: If firms do not adjust prices immediately, changes in the money supply or interest rates affect not only prices but also output and employment. Menu costs are therefore a core basis in New Keynesian economics for explaining why monetary policy moves the real economy in the short run.

Sources reviewed: 2026-10-26

References

Sheshinski, E., & Weiss, Y. (1977). Inflation and costs of price adjustment. Review of Economic Studies, 44(2), 287–303.
Mankiw, N. G. (1985). Small menu costs and large business cycles: A macroeconomic model of monopoly. Quarterly Journal of Economics, 100(2), 529–537.
Akerlof, G. A., & Yellen, J. L. (1985). A near-rational model of the business cycle, with wage and price inertia. Quarterly Journal of Economics, 100(Supplement), 823–838.
Blanchard, O. J., & Kiyotaki, N. (1987). Monopolistic competition and the effects of aggregate demand. American Economic Review, 77(4), 647–666.
Ball, L., & Romer, D. (1990). Real rigidities and the non-neutrality of money. Review of Economic Studies, 57(2), 183–203.
Caplin, A. S., & Spulber, D. F. (1987). Menu costs and the neutrality of money. Quarterly Journal of Economics, 102(4), 703–725.
Levy, D., Bergen, M., Dutta, S., & Venable, R. (1997). The magnitude of menu costs: Direct evidence from large U.S. supermarket chains. Quarterly Journal of Economics, 112(3), 791–825.
Blinder, A. S., Canetti, E. R. D., Lebow, D. E., & Rudd, J. B. (1998). Asking About Prices: A New Approach to Understanding Price Stickiness. New York: Russell Sage Foundation.
Bils, M., & Klenow, P. J. (2004). Some evidence on the importance of sticky prices. Journal of Political Economy, 112(5), 947–985.
Golosov, M., & Lucas, R. E., Jr. (2007). Menu costs and Phillips curves. Journal of Political Economy, 115(2), 171–199.
Nakamura, E., & Steinsson, J. (2008). Five facts about prices: A reevaluation of menu cost models. Quarterly Journal of Economics, 123(4), 1415–1464.
Midrigan, V. (2011). Menu costs, multiproduct firms, and aggregate fluctuations. Econometrica, 79(4), 1139–1180.

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Phillips CurveThe Phillips curve: Phillips's 1958 UK evidence, Samuelson and Solow's policy menu, Friedman and Phelps's expectations-augmented curve and the natural rate, 1970s stagflation, recent flattening debates and monetary policy.📈 Economics Money IllusionWhat money illusion is: judging by nominal amounts rather than real value. Covers Fisher and Keynes, the rational expectations critique, framing experiments by Shafir and colleagues, Fehr and Tyran's experiments, and stock, housing and brain-imaging research.📈 Economics Lucas CritiqueWhat the Lucas critique (1976) is, Marschak's precedent, the Phillips curve case, Sargent–Wallace and Kydland–Prescott, the shift to microfoundations and DSGE models, Sims's VAR alternative and empirical tests.📈 Economics Taylor RuleWhat the Taylor rule is: John Taylor's 1993 formula setting the policy rate by inflation and output gaps, the 0.5 coefficients, the Taylor principle, rules versus discretion, the 2000s low-rate critique and its limits.📈 Economics Quantity theory of moneyThe equation of exchange (MV = PT and MV = PY), Irving Fisher and the Cambridge approach, Milton Friedman's restatement and monetarism, unstable velocity, and why QE didn't immediately spark inflation.📈 Economics

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This article was last updated on October 27, 2026. It is based on widely recognized original works and textbooks; when citing it in a paper, please check the original sources listed in the references.