Final answer:
Prices are often sticky in the short run due to inelastic supply and demand, leading to price adjustments rather than quantity changes. However, in the long run, flexibility increases, affecting quantities more than prices, allowing the economy to adjust to its potential GDP level.
Step-by-step explanation:
Price Stickiness and Economic Adjustment
In the context of economics, prices are said to be sticky when they do not adjust quickly to changes in supply and demand. In the short run, both supply and demand are often inelastic, meaning that any shifts can lead to significant changes in prices rather than quantities. This is because, in the short term, producers and consumers do not have enough time to fully adjust their behaviors and resource allocations to changes in the market.
However, in the long run, supply and demand become more elastic. This elasticity allows for a more muted movement in prices, as both producers and consumers are able to adjust to changes over time. As a result, quantities tend to adjust more than prices in the long run. These adjustments help the macroeconomy return to its level of potential GDP, following the neoclassical perspective that wages and prices, while maybe sticky in the short run, are flexible over time.
The concept of price stickiness is particularly important in understanding how the economy responds to various shocks—in the short run, firms may not change prices due to menu costs, contracts, or market competition, but in the long run, they have more freedom to adjust prices to reach an equilibrium.