page_title: Robinson Crusoe economy
section_title: Equilibrium
hierarchical_section_title: Robinson Crusoe economy / Equilibrium
caption_attribution_description: English: Equilibrium in both production and consumption in the Robinson Crusoe Economy
context_page_description: A Robinson Crusoe economy is a simple framework used to study some fundamental issues in economics. It assumes an economy with one consumer, one producer and two goods. The title "Robinson Crusoe" is a reference to the 1719 novel of the same name authored by Daniel Defoe.
  As a thought experiment in economics, many international trade economists have found this simplified and idealized version of the story important due to its ability to simplify the complexities of the real world. The implicit assumption is that the study of a one agent economy will provide useful insights into the functioning of a real world economy with many economic agents. In other fields of economics, the Robinson Crusoe economy framework 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 and certain aspects of collective benefits. It is used in growth economics to develop growth models for underdeveloped or developing countries to embark upon a steady growth path using techniques of savings and investment.
context_section_description: At equilibrium, the demand for coconuts will equal the supply of coconuts and the demand for labour will equal the supply of labour.
  Graphically this occurs when the diagrams under consumer and producer are superimposed. Notice that,
  MRSLeisure, Coconuts = w
  MPL = w
  => MRSLeisure, Coconuts = MPL
  This ensures that the slopes of the indifference curves and the production set are the same.
  As a result, Crusoe ends up consuming at the same point he would have if he made all the above decisions together. In other words, using the market system has the same outcome as choosing the individual utility maximisation and cost minimisation plans. This is an important result when put into a macro level perspective because it implies that there exists a set of prices for inputs and outputs in the economy such that the profit-maximising behaviour of firms along with the utility-maximizing actions of individuals results in the demand for each good equaling the supply in all markets. This means that a
  competitive equilibrium can exist. The merit of a competitive equilibrium is that an efficient allocation of resources is achievable. In other words, no economic agent can be made better off without making another economic agent worse off.
caption: Figure 5: Equilibrium in both production and consumption in the Robinson Crusoe economy
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