Topic summary
Price stickiness
Extracted from the Wikipedia article Nominal rigidity.
Mathematical example: a little price stickiness can go a long way
To see how a small sector with a fixed price can affect the way rest of the flexible prices behave, suppose that there are two sectors in the economy: a proportion a with flexible prices Pf and a proportion 1 − a that are affected by menu costs with sticky prices Pm. Suppose that the flexible price sector price Pf has the market clearing condition of the following form: