ABSTRACT
The idea that prices are determined by supply and demand rests on certain assumptions about the behavior of individual economic agents. Prices will rise when demand exceeds the capacity of the economy to produce goods and services, and they will fall when supply exceeds demands. Unemployment is interpreted as a measure of underutilized productive resources, and hence, of the gap between overall supply and demand. The scientific economic theory more or less assumes that people estimate the demand and supply curves for their products and use these to set prices and wages. Price-setting rules are a little more complicated than wage setting, but the basic tendency to impose a fixed structure of relative prices is much the same. A good deal less is known about the process of price determination than about wage rates.
