Robinson Crusoe Economy: Understanding Equilibrium in a One-Person Economy, Slides of Microeconomics

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Robinson Crusoe Economy

Joseph Tao-yi Wang

(Lecture 12, Micro Theory I)

Chapter Overview

Ch.3: Equilibrium in an Exchange Economy;

This Chapter: generalize to include

production

Section 5.1:

Simplest economy possible:

Robinson Crusoe Economy (1 person only)

Section 5.2:

General equilibrium model with

production and the 1

st

nd

Welfare Theorem

Section 5.3:

Existence of a Walrasian Equil.

Sec. 5.4-6:

Examples--time, public goods, CRS

In this course, only have time for CRS example

Why do we care about this?
^

Equilibrium is the central concept in economics

Where forces of supply and demand balance out

Empirically used to predict outcome

Robinson Crusoe Economy: See how it worksin the simplest example (one person economy)^

Get intuition about how it works in this “toy model”

Then generalize to other cases…

What if you happen to be in an island alone?

Also, some macro models have only one agent!

One Person Economy:Robinson Crusoe Economy

2 Commodities:

Labor hours (good 1) & corn (2)

Consumers:^

Endowment

:

As if ONE representative agent

:

Robinson Crusoe with endowment:

Single Firm:

with convex production set

ϒ

The Optimum

1

1 , x

y

2

2 , x

y

ω

ϒ +

Example:

Example (Continued):

ϒ

Walrasian Equilibrium:Crusoe the Consumer

1

1 , x

y

2

2 , x

y

ω

ϒ +

Excess Demand for Leisure

Excess Supply for Corn

Example (Continued):

Example (Continued):

Summary of 5.1
^

Robinson the Manager^

Maximize Profit taking prices given

Crusoe the Consumer^

Maximize Utility taking prices given

Walrasian Equilibrium^

Prices where markets clear

Homework: Exercise 5.1-1~

Why would Robinson Crusoe be a price-taker?^

Doesn’t he have market power in this economy?