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Unformatted text preview: roduction economy is an economy with one producer using labour to produce one good, C. On the consumption side there is one aggregate 86 consumer. This is often referred to as a Robinson Crusoe economy and is a special (or strange) case of a production economy.  The production economy is an economy with two producers using capital and labour to produce two goods, X and Y. On the consumption side there are two consumers exchanging the two goods produced, X and Y. Okay, so we now understand where we are going...but how do we get there? Don't we need to consider market structures and all of the other factors that affect the determination of these magical equilibrium price vectors? I'm really glad that you asked me that!!!! For now, not really...meaning that we won't need to concern ourselves with all of the potential market structures in all of the various markets if we assume that all markets under consideration are perfectly competitive. Remember, that simplicity is instructive and we are trying to get the basic idea of how to approach the general equilibrium problem. For example, when you first start training for a marathon you certainly don't start off sprinting for 6 miles... Now, since we are assuming a perfectly competitive market structure for every market, I feel it is imperative that we very briefly review the theoretical features of perfectly competitive markets. Perfect Competition Perfect competition is the most common theoretical model of market structure used in microeconomic analysis. Its definition consists of the following requirements:  Price Takers There are so many agents in the market (both buyers and sellers) that no single agent can have any influence on the market price. The key point is thus not the exact number of agents but the fact that none of them can have any effect on price. In other words, this feature requires that all agents are price takers (they take the market price as given in their optimizations).  Free Entry and Exit Agents can freely enter or leave...
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- Spring '10