The well-known failure of real business cycle models to fit price and wage data and the renewed interest in monetary policy models with sticky prices both highlight the importance of adjustment of prices. A better understanding of price adjustment is necessary to ground business cycle theory and policy analysis on a solid microeconomic foundation. In classical economic models, prices move in such a way as to stabilize production and employment: if demand increases, firms raise prices and this reduces demand. But the link between demand and prices, which follows immediately from standard microeconomic theory, has been difficult to find in the data. Researchers who estimate conventional price equations typically find that prices respond strongly and quickly to factor prices, but are much less responsive to factor prices.