Sticky-Wage Theory of SRAS vs Sticky-Price Theory (Menu Cost Theory) of SRAS

The stuck price sits on opposite sides of the transaction in the two stories

In the sticky-wage story the firm's own output price moves with the price level and its input price is frozen. Picture a bakery whose contract fixes pay at 90 per shift, with a worker producing 30 loaves per shift, so labor costs 3 per loaf. When the price level rises and the loaf sells for 5 instead of 4, the margin per loaf goes from 1 to 2, and the bakery adds shifts. Output rises because the real wage fell. In the sticky-price story the arrangement reverses. A seller who printed a seasonal catalog at 40 per item watches competitors move to 44. Its own price never budged, but relative to rivals it is now about 9 percent cheaper, orders climb, and it produces more. The exam trap follows directly. A student who writes that nominal wages adjust slowly and then labels it the menu cost theory has described the right mechanism under the wrong name. Which price is frozen is the entire distinction, and the two theories freeze different ones.

Menu costs are a threshold, which is why only some firms stay stuck

The menu cost story would collapse if repricing were free, because every firm would adjust instantly and SRAS would be vertical. What makes it work is that changing a posted price consumes real resources: reprinting and mailing catalogs, relabeling shelves, reprogramming registers, renegotiating quoted contracts, and irritating customers who track prices. Suppose reprinting and distributing a catalog costs 200. If matching the going price level would add 150 to the season's margin, the firm leaves its prices alone and lets its relative price slide. If the same reprint would add 750, it reprices at once. Small movements in the price level therefore leave many firms frozen, while large ones do not. The threshold also explains a comparison the theory gets right: in an economy with chronically high inflation, firms reprice constantly, the stickiness mostly disappears, and SRAS becomes close to vertical, so nominal shocks move prices rather than output. And it sets the clock on the short run, which ends when enough firms have reprinted, just as the sticky-wage short run ends when enough contracts expire.

The free response scores the causal chain, not the name of the theory

A prompt asking why SRAS slopes upward accepts either explanation, and the credit goes to a complete chain rather than to a label. The sticky-wage chain runs: the price level rises, nominal wages are locked by contract, the real wage falls, profit per unit rises, firms hire, and quantity supplied increases. The sticky-price chain runs: the price level rises, some firms have not repriced, their relative prices fall, buyers shift toward them, and those firms produce more. The usual place a response loses the point is the middle step, where the real wage or the relative price does the actual work. Everything downstream is shared. Both chains give an upward sloping SRAS and a vertical LRAS, and both end the short run the same way, with costs and posted prices catching up, SRAS shifting left, and output returning to potential at a higher price level. Misperceptions theory is the third accepted route, where producers read a general rise in prices as a rise in their own relative price and expand until they learn otherwise.

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