A Second Survivor...

After some time living alone on the island, Robinson awakens one day to find another human being on the island. Nick survived a few weeks barely holding on to a piece of wood…to finally reach Robinson's island. Once Nick is back in shape, the two men discover that Nick has a similar production capacity as Robinson, but for a different set of goods: he is very good at catching rabbits. Hence the two men can now engage in trade. There is one problem to this: there aren't always fishes to exchange for rabbits or at least not the right amount. And the men don't know each other well so they are not confident enough to exchange goods now for goods in the future…(They don't have paper, and have no confidence in their ability to remember who owes what when). Exchanges are hard to come by on this island until a few boxes of golf balls are found (it seems that the boat that was carrying Nick was carrying a huge number of golf balls). The two men have no use for the golf balls until they have the idea of using these balls as medium of exchange. So now when Robinson does not catch fish, he pays nick a golf ball to eat some rabbit, and vice versa. Nick and Robinson are happy. Nick and Ribinson fine tune their system over time. For example, if Robinson catches a lot of fish, he may sell two fish to Nicks for a golf ball. Robinson my hunger for a rabbit other days and offer two golf balls for a rabbit dinner.

How does the island's economy respond to change in production shocks? The main difference now is when there is a shock to one sector, say, fishes are relatively tough to catch due to a storm. Then the price of fish will increase relative to that of rabbits.

But effects of a general change in production opportunities on labor and consumption will be the same as before. We thus need another shipwreck to make the analysis more interesting! It is important to notice at this stage that what matters are relative prices (the price of one good relative to another). If all prices go up by the same proportion, then this should not motivate any change in consumption.