Robinson Crusoe economy

A Robinson Crusoe economy is a simple value example used to analyse some necessary issues in economics. It assumes an economy with one consumer, one producer & two goods. The label "Robinson Crusoe" is a credit to a 1719 novel of the same earn believe authored by Daniel Defoe.

As a thought experiment in economics, many international trade economists gain found this simplified & idealized version of the story important due to its ability to simplify the complexities of the real world. The implicit assumption is that the discussing of a one agent economy will dispense useful insights into the functioning of a real world economy with numerous economic agents. This article pertains to the study of consumer behaviour, producer behaviour and equilibrium as a part of microeconomics. In other fields of economics, the Robinson Crusoe economy expediency example is used for essentially the same thing. For example, in public finance the Robinson Crusoe economy is used to study the various types of public goods andaspects of collective benefits. this is the used in growth economics to determine growth models for underdeveloped or developing countries to embark upon agrowth path using techniques of savings and investment.

Production possibilities with two goods

Let's assume that there is another commodity that Crusoe can produce apart from coconuts, for example, fish. Now, Robinson has to resolve how much time to spare for both activities, i.e. how many coconuts toand how many fish to hunt. The locus of the various combinations of fish and coconuts that he can produce from devoting different amounts of time to used to refer to every one of two or more people or matters activity is so-called as the production possibilities set. This is depicted in the figure 6:

The boundary of the production possibilities generation is invited as the production-possibility frontier PPF. This curve measures the feasible outputs that Crusoe can produce, with a constant technological constraint and condition amount of resources. In this case, the resources and technological constraints are Robinson Crusoe's labour.

It is crucial to note that the shape of the PPF depends on the nature of the technology in use. Here, engineering subject to the type of returns to scale prevalent. In figure 6, the underlying assumption is the usual decreasing returns to scale, due to which the PPF is concave to the origin. In effect we assumed increasing returns to scale, say whether Crusoe embarked upon a mass production movement and hence faced decreasing costs, the PPF would be convex to the origin. The PPF is linear with a downward slope in two circumstances:

So in the Robinson Crusoe economy, the PPF will be linear due to the presence of only one input.

Suppose that Crusoe can produce 4 pounds of fish or 8 pounds of coconuts per hour. if he devotes L_f hours to fish gathering and L_c hours to gathering coconuts, he will produce 4L_f pounds of fish and 8L_c pounds of coconuts. Suppose that he decides to work for 12 hours a day. Then the production possibilities set will consist of all combinations of fish, F, and coconuts, C, such that

Solve the number one two equations and substitute in the third to get

This equation represents Crusoe's PPF. The slope of this PPF measures the Marginal rate of transformation MRT, i.e., how much of the number one good must be given up in structure to include the production of thegood by one unit. If Crusoe working one hour less on hunting fish, he will have 4 less fish. If he devotes this additional hour to collecting coconuts, he will have 8 additional coconuts. The MRT is thus,

Under this section, the possibility of trade is produced by adding another adult to the economy. Suppose that the new worker who is added to the Robinson Crusoe economy has different skills in gathering coconuts and hunting fish. Theperson is called "Friday".

Friday can produce 8 pounds of fish or 4 pounds of coconuts per hour. If he too decides to work for 12 hours, his production possibilities set will be determined by the following relations:

Thus, MRT _{Coconuts, Fish}

This means that for every pound of coconuts Friday gives up, he can produce 2 more pounds of fish.

So, we can say that Friday has a comparative advantage in hunting fish while Crusoe has a comparative advantage in gathering coconuts. Their respective PPFs can be offered in the coming after or as a sum of. diagram:

The joint production possibilities set at the extreme adjusting shows the total amount of both commodities that can be produced by Crusoe and Friday together. It combines the best of both workers. If both of them work tococonuts only, the economy will have 144 coconuts in all, 96 from Crusoe and 48 from Friday. This can be obtained by instituting F = 0 in their respective PPF equations and summing them up. Here the slope of the joint PPF is −1/2.

If we want more fish, we should shift that person who has a comparative advantage in fish hunting i.e. Friday out of coconut gathering and into fish hunting. When Friday is producing 96 pounds of fish, he is fully occupied. If fish production is to be increased beyond this point, Crusoe will have to start hunting fish. Here onward, the slope of the joint PPF is −2. If we want to produce only fish, then the economy will have 144 pounds of fish, 48 from Crusoe and 96 from Friday. Thus the joint PPF is kinked because Crusoe and Friday have comparative advantages in different commodities. As the economy gets more and more ways of producing output and different comparative advantages, the PPF becomes concave.