Book contents
- Frontmatter
- Contents
- List of illustrations
- Introduction to the second edition
- Preface to the second edition
- Preface to the first edition
- Table of notation
- Table of assumptions
- A General equilibrium theory: Getting acquainted
- 1 Concept and history of general equilibrium theory
- 2 An elementary general equilibrium model: The Robinson Crusoe economy
- 3 The Edgeworth box
- 4 Integrating production and multiple consumption decisions: A 2 × 2 × 2 model
- 5 Existence of general equilibrium in an economy with an excess demand function
- B Mathematics
- C An economy with bounded production technology and supply and demand functions
- D An economy with unbounded production technology and supply and demand functions
- E Welfare economics and the scope of markets
- F Bargaining and equilibrium: The core
- G An economy with supply and demand correspondences
- H Standing on the shoulders of giants
- Bibliography
- Index
4 - Integrating production and multiple consumption decisions: A 2 × 2 × 2 model
from A - General equilibrium theory: Getting acquainted
Published online by Cambridge University Press: 05 June 2012
- Frontmatter
- Contents
- List of illustrations
- Introduction to the second edition
- Preface to the second edition
- Preface to the first edition
- Table of notation
- Table of assumptions
- A General equilibrium theory: Getting acquainted
- 1 Concept and history of general equilibrium theory
- 2 An elementary general equilibrium model: The Robinson Crusoe economy
- 3 The Edgeworth box
- 4 Integrating production and multiple consumption decisions: A 2 × 2 × 2 model
- 5 Existence of general equilibrium in an economy with an excess demand function
- B Mathematics
- C An economy with bounded production technology and supply and demand functions
- D An economy with unbounded production technology and supply and demand functions
- E Welfare economics and the scope of markets
- F Bargaining and equilibrium: The core
- G An economy with supply and demand correspondences
- H Standing on the shoulders of giants
- Bibliography
- Index
Summary
Now we need to take one further step, to bring the production decision and the interpersonal allocation decision together. The Edgeworth box model, presented in Chapter 3, treats efficient allocation of consumption among households but doesn't treat production. The Robinson Crusoe model, developed in Chapter 2, treats efficient choice of production outputs but doesn't treat consumption allocation between households. Neither treats explicitly the efficient allocation of inputs to production. We'll integrate all of these disparate elements in this chapter, by introducing a 2 factor × 2 commodity × 2 household general equilibrium model.
The Robinson Crusoe model treated the consumption/production interaction with only one household. We can now combine the Robinson Crusoe production decision with the Edgeworth box consumption allocation to portray the production/interpersonal allocation decision at one shot. The joint equilibrium of production and interpersonal allocation is depicted in Figure 4.1. For each price ratio, the production sector chooses the profit-maximizing output mix. The Edgeworth box then depicts the allocation of these outputs between households. The budget line in the box shows how households react to prevailing prices. The figure shows the production decision as profit maximization subject to prevailing prices, technology, and resources, just as in the Robinson Crusoe model. The slopes of the isoprofit line and of the budget line are identical.
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- Information
- General Equilibrium TheoryAn Introduction, pp. 44 - 57Publisher: Cambridge University PressPrint publication year: 2011