Question

. The key difference between the long-run and short-run model is the assumption that prices are flexible. In the short-run prices are assumed to be fixed (or, at least, prices are expected not to fall). Why might prices be sticky downward?

Answer 1

Sticky down is a situation where market prices are resistant to change downwards. In this case prices will rise far more quickly than they would fall.

Several reasons why prices must be sticky downwards is due to imperfect information, market distortions or the Decision of the firm to maximize profits in the short run .

This type of price stickiness is more possible in cases where the good is a necessity good where consumers are not likely to reduce consumption even though the price is above the market clearing equilibrium Price level.