Market- General Equilibriun Production Pure exchange ave no production. All of the abowe analysis can be extended to the case of production ner, one producer and two goods. (This is the simplest possible case- it can be generalised) are the"same person". This is not unreasonable. most of us are both and producers simultaneously everyone has to work for a living, including Robinson Crusoe. The goods are coconuts, C, and leisure. Recall labour supply (L)can be derived from leisure demand. The price of leisure is u and coconuts are the numeraire. There is a production technology which turns labour into coconuts. Indifference Production function L Market General Equilibriun Robinson Crusoe Economy Economists call this model the Robinson Crusoe economy. The firm maximises profit- pushing the isoprofit line upward until it is tangent to the production function. he c maximises utility -pushing the indifference curve upward until it is tangent to the budget line. Indifference curve roduction function The slope of the budget line(and the isoprofit line)is w. The marginal product is set equal to u at the optimum (as usual) and the MRS is set equal to the price ratio(a)as usual. Putting these two pictures together yields the diagram on the last slide. The budget line and the isoprofit line must coincide- any profits that are made during production are all that is available to be spenMarket — General Equilibrium 7 Production • Pure exchange economies have no production. All of the above analysis can be extended to the case of production. • There is one consumer, one producer and two goods. (This is the simplest possible case — it can be generalised). • In fact, the firm and the consumer are the “same person”. This is not unreasonable, most of us are both consumers and producers simultaneously — everyone has to work for a living, including Robinson Crusoe. • The goods are coconuts, C, and leisure. Recall labour supply (L) can be derived from leisure demand. The price of leisure is w and coconuts are the numeraire. There is a production technology which turns labour into coconuts. ............. ............. ............. ............. ............. ........... . . . . . . ......................................................................................................................................................................................................................................................................................................................................................................................................................... ................................................................................................................................................................................................................................................................................................... ........................................................................................................................ ........................................................................................................................ ........................................................................................................................ 0 L C Production function Indifference curves C ∗ • L ∗ Market — General Equilibrium 8 Robinson Crusoe Economy • Economists call this model the Robinson Crusoe economy. • The firm maximises profit — pushing the isoprofit line upward until it is tangent to the production function. • The consumer maximises utility — pushing the indifference curve upward until it is tangent to the budget line. ............. ............. ............. ............. ............. ........... . . . . . . ............. ............. ............. ............. ............. ........... . . . . . . . . . . . . . . ....................................................................................................................................................................................................................................................................................................................................................................................................................... .................................................................................................................................................................................................................................................................................................................................................................................................................................. ...................................................................................................................................................................................................................................................................................................................................... ...................................................................................................................................................................................................................................................................................................... . ................................................................................................................................................................................................................................................................................................... ........................................................................................................................ 0 L 0 C L C Production function Isoprofit line Indifference curve Budget line C ∗ • • L ∗ C ∗ L ∗ L • The slope of the budget line (and the isoprofit line) is w. The marginal product is set equal to w at the optimum (as usual) and the MRS is set equal to the price ratio (w) as usual. • Putting these two pictures together yields the diagram on the last slide. The budget line and the isoprofit line must coincide — any profits that are made during production are all that is available to be spent