Question

Two factor-two comodities general equilibrium of production

Answer 1

We now extend our analysis of general equilibrium to the sphere of production. Production of goods requires the use of inputs or factors of production. The level of production of goods depends upon the allocation of resources to them.

As emphasised in the beginning, the general equilibrium analysis takes into account the mutual inter-dependence of markets. In it, we are not only concerned with the mutual inter-dependence of markets for goods between themselves but also between prod­uct markets and factor markets. To keep our analysis simple we shall assume that two factors or inputs labour and capital, are required for the production of two goods X and Y.

This analysis of general equilibrium by taking two goods and two factors will enable us to capture the essential characteristics of the general equilibrium of production, besides taking 2 x 2 model, we make the following assumptions: