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Unemployment and Inflation

Costs of Inflation: Shoe-leather Costs and Menu Costs


Costs of Inflation: Shoe-leather Costs, Menu Costs, and Tax Costs

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Now, let's see some of the side effects of inflation, some costs that occur because of inflation. So even if we perfectly anticipate inflation, we know how much inflation there's gonna be, well there's still gonna be some cost that we must incur as a society. So let's check out these three that we've got listed here. The most common ones. The first one here is shoe leather costs and this is resources wasted because you're trying to avoid holding money. Okay. The idea is that prices are going up and like we've discussed in other videos, holding cash is bad when prices go up because the increased prices, the cash is just gonna be worth less. So this idea of shoe leather costs, it's the imagery of you of the wear and tear on your shoes running back and forth to the bank because of having to go to the bank so often because you need more cash or you need less cash, right? You're trying to avoid holding it. So in essence, what it really means is that time and and convenience Of holding less cash right? You have to spend more time going to the bank because you don't want to hold it and you needed to earn the interest in the bank. It's not convenient to hold cash anymore because maybe now something costs, you know, if something, if a gallon of milk costs $10,000, right? And now you have to pull $10,000 out of your pocket and you're carrying tons of cash around all the time, all these loads of cash, it's not convenient, right? So these are the shoe leather costs. Now, typically we have low inflation. This is a typical situation where we have low inflation, so it's usually trivial because it's not that big of a deal. If the price of milk goes from $3 to 3 20 or something like that, you know, like it's not gonna have so many shoe leather costs. Of course that's a big increase in the price of milk, but it's not um gonna have a lot of shoe leather costs there. However, if it goes to hyperinflation, like that situation where I said now a gallon of milk costs $10,000 and you're carrying all this cash. Well that's gonna be pretty serious. So hyperinflation is extraordinarily rapid inflation. It's gonna be a really high inflation rate. You're gonna, you're gonna know if a professor is talking about hyperinflation, it's gonna be uh inflation rate generally above 50% and it does happen, it's happened in recent history um in some countries in in post World War One Germany it happened and Zimbabwe saw hyperinflation, things like that. It does occur. So that's the first one. The shoe leather cost. Let's move on to the next one here, menu costs so many cost is the cost businesses face from changing prices. So when a business has to print new price tags out or a restaurant. This is the imagery that it's alluding to here. The menu cost is a restaurant having to print out a new menu because of the changed prices. How how weird does it look when you go to a restaurant and you look at the menu and they put a sticker over the price and you're like, oh man I totally tell you rose the price on me because they're trying to avoid these menu costs are just trying to put a little sticker to change to not have to print a whole new menu right? Because of these increased costs. They have the increased prices now. Um So you can imagine the more regularly that you have to do this. Well the higher the menu costs are gonna be and what we'll see is in hyperinflation in situations of hyperinflation. Imagine if those prices are changing daily weekly it's gonna be a lot of many cost because you have to constantly re tag everything okay. The last one here is kind of interesting is the tax costs because if prices are rising there might be phantom income that you've made right? Maybe in our example we have you purchase land for $100,000 and there's 10% inflation so that 10% inflation has brought the value of the land up to this $110,000. So when you sell it, well the government's gonna say hey you had a profit of $10,000. I'm gonna tax you on that profit. However did you really profit? The inflation is what caused that price to rise? Not really profit. Not really market value of the land. It was just inflation so you're gonna still have to pay tax. But was it really again, was it really again? Not really Right. We're seeing that the inflation caused the price to rise so you don't really have any extra purchasing power with that $110,000. The prices have gone up that same. 10%. Cool. So that's about it here. The main ones. You want to remember, the shoe leather, the menu and the tax cost I think shoe leather and menu costs because they have those funny names. They tend to come up just like multiple choice questions where they want to have you defined it something like that. But overall. Pretty standard stuff here. Let's go ahead and move on to the next video.