Menu costs are a microeconomic concept used to explain why nominal prices in an economy adjust slowly rather than instantaneously to changes in demand, supply, or monetary policy. The term originates from the literal example of a restaurant having to reprint its menus whenever it changes prices — a small but non-zero expense that may discourage frequent adjustments.
In modern usage, menu costs encompass a broader set of frictions, including:
- Physical costs: reprinting catalogs, relabeling shelves, updating vending machines or fuel pumps.
- Managerial costs: time spent deciding on new prices, internal approvals, and recalculating contracts.
- Customer-relations costs: the risk of antagonizing buyers or triggering renegotiation by changing posted prices.
- Information costs: communicating new prices to sales staff, distributors, and downstream firms.
The concept is central to New Keynesian economics, which uses menu costs to justify the assumption of sticky prices — a key mechanism by which monetary policy can have real effects on output and employment in the short run. If firms could costlessly reprice, a change in the money supply would translate immediately into proportional price changes and have no impact on real variables (the classical dichotomy). Because repricing is costly, firms instead adjust quantities, hours, or inventories, allowing central-bank actions to influence the real economy.
Economists N. Gregory Mankiw (1985) and George Akerlof and Janet Yellen (1985) formalized the idea, showing that even small menu costs can produce large macroeconomic fluctuations — a result sometimes called the near-rationality argument. Empirical work by Mark Bils and Peter Klenow (2004), using U.S. CPI micro-data, found that consumer prices change more frequently than earlier models assumed, sparking debate over how much price stickiness menu costs actually generate versus other frictions like information rigidity or strategic complementarity.
For policy researchers, menu costs underpin arguments for active monetary stabilization and help explain phenomena ranging from inflation inertia to the asymmetric effects of disinflation.
Example
When U.S. inflation surged in 2021–2022, many restaurants delayed reprinting menus and instead used stickers or QR-code digital menus to reduce the menu costs of frequent price updates.