Price Stickiness
The tendency of prices to respond slowly to changes in supply and demand conditions.
What is Price Stickiness?
Price stickiness (also called nominal rigidity) is the tendency of prices and wages to adjust slowly in response to changes in economic conditions, rather than moving instantly to their new equilibrium levels as classical economic theory assumes. Prices can be sticky upward (resistant to decreases) or downward (resistant to increases), though downward wage stickiness is especially well-documented. Causes include menu costs, long-term contracts, customer relationships, fairness perceptions, and coordination problems among firms. Price stickiness is a cornerstone of Keynesian economics: because prices cannot instantly clear markets, short-run changes in aggregate demand produce real effects on output and employment rather than simply causing immediate price adjustments.
Example
During the 2008–2009 recession, U.S. corporate revenues fell sharply but consumer prices declined only modestly — falling about 2% at the trough. Classical theory would predict rapid price declines to clear excess supply, but sticky prices meant the adjustment came instead through reduced output and rising unemployment. This real contraction is exactly what Keynesian models — built on price stickiness assumptions — predicted and why stimulus was advocated.