Our first application is the static general equilibrium model. The model is called static since intertemporal aspects, such as savings and investment, are excluded by assumption. Consequently the capital stock of the economy is constant and we concentrate on the intersectoral allocation of resources and labour–leisure choices. In this chapter, we start the discussion with the most simple model structure and then successively introduce additional complexities, like government activity, intermediate goods production, or international trade. The most simple model structure comprises a closed economy with a representative consumer who supplies labour and capital in fixed amounts which are used by firms to produce two consumption goods. Section 3.1.1 develops the so-called ‘command optimum’ using this basic model. This is the allocation that would be chosen by a social planner who knows endowments, technologies, and preferences. After that we compare the command optimum to the allocation in a market economy. Then we introduce variable labour supply and government activities. The representative household supplies his endowment of capital .K̅ and labour .L̅ to the firms which use these inputs to produce output Y1 and Y2 of goods 1 and 2. Household consumption is denoted by X1 and X2 respectively. The economic problem is to allocate the scarce factor resources K and L to the two different types of firms in order to produce an output combination which maximizes the utility of the representative household. The latter is called an efficient allocation. In order to find the efficient allocation we first have to specify preferences and technologies.