Glossary
Standard Economic Model
What is the standard economic model?
“Standard economic model” is shorthand for a benchmark used in an analysis. It does not name one uniquely defined model. Common benchmarks explain choices through preferences, constraints, and optimization.
What assumptions does it make?
A consumer-choice model might describe someone choosing their preferred affordable bundle of goods. That alone does not imply perfect foresight, complete knowledge of the world, or exclusively selfish preferences.
Camerer and Loewenstein explain how behavioral economics modifies selected assumptions of conventional models. They also note that concern for fairness is not logically excluded by the core economic approach.
Examples of economic benchmarks
A consumer model can ask which bundle of goods is preferred within a budget. A firm model can ask which production choice yields the highest profit given costs and constraints. They answer different questions and need their own assumptions about preferences, information, technology, and markets.
Preference assumptions in a consumer model
A common benchmark assumes complete and transitive preferences. Completeness means that the consumer can compare any two relevant bundles, including being indifferent between them. Transitivity means that if bundle A is preferred to B and B to C, A is preferred to C.
For example, hold the occasion and available bundles fixed. Suppose a consumer ranks a sandwich with tea above a salad with tea, and the salad with tea above soup with tea. Transitivity rules out placing the soup bundle above the sandwich bundle in that same ranking. Prices and the budget then determine which bundles are feasible.
These are assumptions about the structure of preferences, as explained in MIT’s choice-theory lectures. Assumptions about information, self-interest, and foresight must be specified separately and vary across models.
Why it matters
Specify the model before criticizing it. “Utility” represents what the model says a person values; it need not mean money or personal material gain. A useful comparison tests the predictions of a particular benchmark against alternatives.