Menu Costs and Exchange Rate Depreciations in Lebanon

This (slightly technical) economic digest is prepared by Dr Samih Antoine Azar, Professor of Economics and Finance at Haigazian University.

Menu costs are the costs of changing reported unit costs by a given firm to the public or to its customers. Unit costs in turn vary with inflation, and inflation variability. In an open economy, inflation and currency depreciation are intertwined. In Lebanon both average currency depreciation and volatility have lately witnessed dramatic fluctuations. Therefore, it has become evident to most businesses that selling prices ought to be adjusted for these fluctuations in order to keep the normal turnover and flow of the merchandise and preserve the supply chain. In economic terms, additional menu costs must be balanced by the revenue from selling at the adjusted (higher) prices; and if business aims at minimizing menu costs the marginal menu cost must equal the marginal revenue from changing (and increasing) prices.

This digest develops a simple model of menu costs. It also calculates the optimal menu costs involved for 1000 individual goods and items, like for a supermarket. The direct and indirect overhead menu costs necessary to adjust prices is assumed to vary non-linearly with turnover, or market sale and demand. The complete model is relegated to the appendix.

For the full text plus appendix, please click on the below link:

Menu Costs and Exchange Rate Depreciations in Lebanon




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