1. Rice
Rice
•Assume an economy with 2 people growing rice
•They both produce enough to feed themselves
2. Rice Rice
Rice Rice
•There is a technological advancement that allows both of them to double their
production of rice
•There is no incentive for either of them to produce this level of output.
•In the short run they have a increase in the quality of life because they only have to
work for half the time to produce the same output as earlier ( In society this reflects
as unemployment)
3. Rice Carrots
Rice
•Working at half the productive capacity is not the normal equilibrium
•One of the persons decides to use his spare time to grow carrots
•He finds that while his rice has no takers (price = Zero) , the carrot is in demand
with the second person
4. Carrots Carrots
Rice Rice
•The new normal is as specified, The carrot producer now produces surplus carrots
in exchange for rice
•The economy of 2 people now runs at full productive capacity but have significantly
increased their consumption
•The consumption has moved from one bushel of rice / person to Rice + Carrots /
person (value is created)
5. Carrots Carrots
Rice Rice
•With time productivity increases even further and 1 person can produces all the
food for the economy.
•Now the surplus food can fetch a surplus telephone produced by the second man
