ABSTRACT
This chapter develops a competitive model of the economy. The key assumptions needed for this model are spelled out in detail. One important aspect of this model is the “numeraire” or the commodity price that is used as a reference in the model. A distinction is made between accounting prices and relative prices and it is seen that traditional general equilibrium analysis does not determine the level of accounting prices, but rather simply relative prices. A number of modifications to the model are mentioned and add a sense of “realism” to the framework. These modifications include the introduction of futures markets, quantity constraints, and the costs associated with carrying out a transaction.
