What do sticky prices refer to?

Sticky prices refer to prices that do not change easily in response to market fluctuations. This phenomenon is often seen in various sectors of the economy where prices remain fixed for a period, despite changes in supply and demand. For instance, businesses might hesitate to increase their prices due to fear of losing customers or in the expectation that the market will stabilize. Similarly, a decrease in demand may not lead to a decrease in price immediately due to contracts, wage rigidity, and other factors.

This concept is crucial in macroeconomics because it helps explain why economies can experience prolonged periods of high unemployment or slow recovery after a downturn, as businesses might not adjust their prices downward even when overall demand decreases. Understanding sticky prices provides insight into the dynamics of inflation, output, and employment levels in the short run.