- The Robinson Crusoe model is an example of a "Centralized Economy". - one decision-maker: natural here -- only 1 person! - New macro: often assumes many people (all identical). Then the Crusoe problem is like a problem showing ` “social planner’s” the `best outcome. - as noted below the solution and the competitive market “planner’s” outcome are the same in certain circumstances. - sometimes it is easier to solve the planners problem. A Decentralized Market Economy Version of Model: – Cruose’s - Separate Crusoe the consumer and supplier of labour from Crusoe the producer and seller of goods. - Assume Crusoe is a if the markets are competitive) “price taker” (as - Coordination of Crusoe`s decisions via markets (market prices key). - This is unnatural in a one-person econony (useful if assume a an economy with many identical people “Representative Agent” – whose actions can be modelled as if one decision-maker) - Crusoe as a Consumer: - Buys goods at the price 'P' per unit (P given: price taker) - Sells labour time at a wage rate 'W' per unit (W given too). - Crusoe is the only person in the economy so he owns the firm and receives its profits () as income. - Budget constraint: income = spending WL + = P c (is assumed fixed by  Crusoe the consumer)
- The Robinson Crusoe model is an example of a "Centralized Economy". - one decision-maker: natural here -- only 1 person! - New macro: often assumes many people (all identical). Then the Crusoe problem is like a “social planner’s” problem showing ` the `best outcome. - as noted below the “planner’s” solution and the competitive market outcome are the same in certain circumstances. - sometimes it is easier to solve the planners problem. A Decentralized – Market Economy Version of Cruose’s Model: - Separate Crusoe the consumer and supplier of labour from Crusoe the producer and seller of goods. - Assume Crusoe is a “price taker” (as if the markets are competitive) - Coordination of Crusoe`s decisions via markets (market prices key). - This is unnatural in a one-person econony (useful if assume a “Representative Agent” – an economy with many identical people whose actions can be modelled as if one decision-maker) - Crusoe as a Consumer: - Buys goods at the price 'P' per unit (P given: price taker) - Sells labour time at a wage rate 'W' per unit (W given too). - Crusoe is the only person in the economy so he owns the firm and receives its profits () as income. - Budget constraint: income = spending WL +  = P c (is assumed fixed by Crusoe the consumer)