Menu Costs

Published Jan 6, 2023

Definition of Menu Costs

Menu costs are the costs associated with changing the prices of goods and services. That means they describe the expenses that businesses have to bear when they adjust their prices in response to changes in the market. These expenses can include the costs of printing new menus or brochures, updating price lists on websites, or informing customers of the new prices.

Example

To illustrate this, let’s look at a restaurant. Assume the restaurant has to increase the prices of its dishes due to rising food costs (e.g., due to inflation). To do this, the restaurant has to print new menus, probably update its website, and probably update the prices in their cash register. All of these activities require time and money, which are considered menu costs. Note that this includes both explicit and implicit costs.

In addition to that, the restaurant also has to consider the potential costs of potential customer dissatisfaction. That means, if the customers don’t like the new prices, they may decide to go to a different restaurant. This could lead to a decrease in sales and, thus, a decrease in profits.

Why Menu Costs Matter

Menu costs are an important factor for businesses when it comes to setting prices. That means if the costs of changing prices are too high, businesses may decide to keep their prices the same even if the market conditions have changed. This can lead to a misallocation of resources and, thus, a decrease in economic efficiency (which may result in a deadweight loss). Therefore, it is important for businesses to consider the costs of changing prices when making pricing decisions.