- By
**emmly** - Follow User

- 101 Views
- Uploaded on

Download Presentation
## PowerPoint Slideshow about 'Production' - emmly

**An Image/Link below is provided (as is) to download presentation**

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript

Exchange Economies (revisited)

- No production, only endowments, so no description of how resources are converted to consumables.
- General equilibrium: all markets clear simultaneously.

Now Add Production ...

- Add input markets, output markets, describe firms’ technologies, the distributions of firms’ outputs and profits … That’s not easy!

Robinson Crusoe’s Economy

- One agent, Robinson Crusoe (RC)
- Endowed with a fixed quantity of one resource -- 24 hours.
- Use time for labor (production) or leisure (consumption).
- Labor time = L. Leisure time = 24 - L.
- What will RC choose?

Robinson Crusoe’s Technology

- Technology: Labor produces output (coconuts) according to a concave production function.

Robinson Crusoe’s Preferences

- RC’s preferences:
- coconut is a good
- leisure is a good

Robinson Crusoe’s Choice

Coconuts

More preferred

Production function

Feasible productionplans

24

0

Labor (hours)

Leisure (hours)

24

0

Output

Labor

Leisure

Robinson Crusoe’s ChoiceCoconuts

Production function

C*

L*

24

0

Labor (hours)

Leisure (hours)

24

0

Robinson Crusoe as a Firm

- Now suppose RC is both a utility-maximizing consumer and a profit-maximizing firm.
- Use coconuts as the numeraire good; i.e. price of a coconut = $1.
- RC’s wage rate is w.
- Coconut output level is C.

Robinson Crusoe as a Firm

- RC’s firm’s profit is = C - wL.
- = C - wL …………………..…, the equation of an isoprofit line.
- Slope = + w .
- Intercept = .

Isoprofit slope = production function slope

i.e. w = ………………………………….

Output

supply

Given w, RC’s firm’s quantity

demanded of labor is L* and

output quantity supplied is C*.

Labor

demand

RC as a firm gets

Profit-MaximizationCoconuts

Production function

C*

L*

24

0

Labor (hours)

Utility-Maximization

- Now consider RC as a consumer endowed with $* who can work for $w per hour.
- What is RC’s most preferred consumption bundle?
- Budget constraint is

Output

demand

Given w, RC’s quantity

supplied of labor is L* and

output quantity demanded is C*.

Labor

supply

Utility-MaximizationCoconuts

Budget constraint; slope = w

C*

L*

24

0

Labor (hours)

Utility-Maximization & Profit-Maximization

- Profit-maximization:
- w = MPL
- quantity of output supplied = C*
- quantity of labor demanded = L*
- Utility-maximization:
- w = MRS
- quantity of output demanded = C*
- quantity of labor supplied = L*

Coconut and labor

markets both clear.

Utility-Maximization & Profit-Maximization

Coconuts

MRS = w= MPL

Given w, RC’s quantity

supplied of labor = quantity

demanded of labor = L* and

output quantity demanded =

output quantity supplied = C*.

C*

L*

24

0

Labor (hours)

Pareto Efficiency

Coconuts

MRS = MPL. The common slope relative

wage rate w that implements the Pareto efficient plan by

decentralized pricing.

24

0

Labor (hours)

- MRS = MPL, ………………………..

First Fundamental Theorem of Welfare Economics

- A competitive market equilibrium is Pareto efficient if
- consumers’ preferences are ………..
- there are …………………….…. in consumption or production.

Second Fundamental Theorem of Welfare Economics

- Any Pareto efficient economic state can be achieved as a competitive market equilibrium if
- consumers’ preferences are ……………….
- firms’ technologies are ……………….
- there are ………………………. in consumption or production.

Non-Convex Technologies

- Do the Welfare Theorems hold if firms have non-convex technologies?
- The 1st Theorem does not rely upon firms’ technologies being convex.

Non-Convex Technologies

Coconuts

MRS = MPLThe common slope relative

wage rate w that

implements the Pareto

efficient plan by

decentralized pricing.

24

0

Labor (hours)

Non-Convex Technologies

- Do the Welfare Theorems hold if firms have non-convex technologies?
- The 2nd Theorem does require that firms’ technologies be convex.

Non-Convex Technologies

Coconuts

MRS = MPL. The Pareto optimal allocation……… be implemented by

a competitive equilibrium.

24

0

Labor (hours)

Production Possibilities

- Resource and technological limitations restrict what an economy can produce.
- The set of all feasible output bundles is the economy’s ……………………...
- The set’s outer boundary is the …………… ………...

Production Possibilities

Coconuts

PPF’s slope is the ………………

………………………………………

Increasingly negative MRPT

increasing opportunity

cost to specialization.

Fish

Production Possibilities

- If there are no production externalities then a PPF will be concave w.r.t. the origin.
- Why?
- Because efficient production requires exploitation of comparative advantages.

Comparative Advantage

C

RC

MRPT = -2/3 coconuts/fish so opp. cost of one

more fish is …… foregone coconuts.

20

RC has the comparative

opp. cost advantage in

producing fish.

30

F

C

MF

50

MRPT = -2 coconuts/fish so opp. cost of one

more fish is …… foregone coconuts.

25

F

Comparative Advantage

C

RC

MRPT = -2/3 coconuts/fish so opp. cost of one

more coconut is …… foregone fish.

20

30

F

C

MF

50

MRPT = -2 coconuts/fish so opp. cost of one

more coconut is …… foregone fish.

MF has the comparative

opp. cost advantage in

producing coconuts.

25

F

Comparative Advantage

C

RC

Economy

C

20

Use ….. to produce

fish before using ……

70

30

F

C

MF

50

Use ….. to

produce

coconuts before

using …..

50

30

55

F

25

F

Comparative Advantage

Economy

C

Using low opp. cost

producers first results

in a ppf that is concave

w.r.t the origin.

More producers with

different opp. costs

“smooth out” the ppf.

F

Coordinating Production & Consumption

- The PPF contains many technically efficient output bundles.
- Which are Pareto efficient for consumers?

Coordinating Production & Consumption

Coconuts

Output bundle is

and is the aggregate

endowment for distribution

to consumers RC and MF.

Fish

say to RC and

to MF.

Coordinating Production & Consumption

Coconuts

OMF

Contract Curve

ORC

Fish

Coordinating Production & Consumption

Coconuts

However,

………………….

OMF

RC’s indifferent curve

MF’s indifferent curve

ORC

Fish

Coordinating Production & Consumption

Coconuts

If instead produce

and give MF same allocation as before. → MF’s utility is ………………..

OMF

ORC

Fish

Coordinating Production & Consumption

Coconuts

MF’s utility is unchanged,

But RC’s utility is ……..…. ;

Pareto improvement

OMF

O’MF

ORC

Fish

Coordinating Production & Consumption

- MRS MRPT inefficient coordination of production and consumption.
- Hence, MRS = MRPT is necessary for a Pareto optimal economic state.

Decentralized Coordination of Production & Consumption

- The above Pareto optimal production and consumption can be achieved by decentralized behaviours of firms and consumers
- Competitive markets, profit-maximization, and utility maximization all together can result in a Pareto optimal economic state

Decentralized Coordination of Production & Consumption

- RC and MF jointly run a firm producing coconuts and fish.
- RC and MF are also consumers who can sell labor.
- Price of coconut = pC.
- Price of fish = pF.
- RC’s wage rate = wRC.
- MF’s wage rate = wMF.

Decentralized Coordination of Production & Consumption

- LRC, LMF are amounts of labor purchased from RC and MF.
- Firm’s profit-maximization problem is choose

C, F, LRC and LMF to

Decentralized Coordination of Production & Consumption

Equation for Isoprofit line is

which rearranges to

Decentralized Coordination of Production & Consumption

Coconuts

Higher profit

The firm’s production

possibility set.

Fish

Decentralized Coordination of Production & Consumption

Coconuts

Profit-max. plan

Competitive markets

and profit-maximization

Fish

Decentralized Coordination of Production & Consumption

- So competitive markets, profit-maximization, and utility maximization all together causethe condition necessary for a Pareto optimal economic state.

Decentralized Coordination of Production & Consumption

Coconuts

Competitive markets

and utility-maximization

OMF

ORC

Fish

Decentralized Coordination of Production & Consumption

Coconuts

Competitive markets, utility-

maximization and profit-

maximization

OMF

ORC

Fish

Download Presentation

Connecting to Server..