What is meant by price rigidity?

Price rigidity refers to a situation in which prices do not adjust quickly or readily in response to changes in supply and demand or other market conditions. This phenomenon can occur for various reasons, such as long-term contracts, menu costs (the costs associated with changing prices), or the desire of firms to maintain stable pricing to build customer loyalty.

When prices are rigid, it can lead to discrepancies in the market, such as shortages or surpluses, because the price mechanism is not functioning as quickly as it ideally would in response to shifting economic conditions. This can impact overall economic performance and the efficiency of resource allocation within a market.

In contrast, choices that describe frequent price fluctuations, the ability of firms to swiftly change prices, or a uniform pricing methodology across all industries do not accurately capture the essence of price rigidity. These misrepresentations overlook the core concept that price rigidity specifically involves a reluctance or inability to adjust prices promptly, regardless of economic signals.