ABSTRACT
Price is the bedrock of the standard model. According to this model, price guides consumers and producers to their best choices. The standard model assumes each consumer can buy any quantity of a good or service without affecting its price. Consumers gratify their desires by means of their purchases subject to their budget constraints. The standard model assumes a seller can buy the factors of production and sell any amount of its outputs without affecting the prices of the factors of production or the prices of its products. On the other side of every consumer’s transaction is a seller who makes the goods and services bought by consumers. On the basis of its assumption about the nature of consumers’ tastes and producers’ technologies, the standard model deduces the existence of prices capable of clearing all the markets. At these prices consumers maximize the satisfaction they derive from their purchases and producers maximize their profits from their sales. The static version of the standard model takes as given all the resources in the economy. There is no involuntary unemployment because wages settle at levels at which anybody who wants work can find it and anyone who wants workers can hire them. There are no unwanted inventories of unsold commodities because prices are such that buyers will take all that sellers want to offer. These conclusions are logical consequences of the assumptions about the nature of consumers’ preferences and the nature of producers’ technologies in the standard model.
