What is Sticky Price?
Sticky Prices are the costs that are immune to instant market fluctuations. These are the prices that stick. They don't really change significantly in response to the changes in demand, manufacturing costs and certainly not as quickly as other items.
Sticky pricing can be seen very often in markets with imperfect competition, a lack of growth, or a lot of regulatory oversight.
Understanding of Sticky Prices
If we think about the law of supply and demand, it indicates that prices go up when the supply increases and the prices drop as supply is abundant. However, due to price stickiness, this may not be the case with particular goods in the market. The complexities, efforts, and expenses of altering rates to increase production may not seem important to a firm in some cases, especially if the rates they're asking have been widely recognized.
There's no doubt that over time, consumers become used to spending a large amount on a specific item, and this habit starts to grow. And once consumers are in that situation, it can be difficult to get them out – to the point where boosting costs is at odds with preserving their company. Even if the market has switched in a firm's best interest, a price increase may not be enough to compensate for the losses experienced.
Practical Example
In the month of January, The price of cheese has dropped dramatically. Cheese is regularly used in the cuisine of an Italian restaurant in New York called "Italiano." However, Gabriel, the chef was unlikely to lower his prices at the restaurant even if his expenses were reduced. Instead, he can just earn from the higher margin. Customers do not notice a price gap, despite the fact that it should have changed due to changing market forces. This also goes both ways. Because when the price of cheese rise in the future it will not guarantee price changes of Italiano's pasta dishes.
In Sentences
- Sticky price is commonly used in economics that indicates little or no change in prices even though market forces are fluctuating.