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Some Analytical Tools

In: The Distorted Economy

Author

Listed:
  • Hans C. Blomqvist
  • Mats Lundahl

Abstract

The welfare problem is complicated and in order to carry out a more profound analysis we need to master some technical refinements, ‘tools’, that may be used in the study of the allocation affects of different distortions. The present chapter provides a set of such tools. We begin with a look at the characteristics of linearly homogeneous production functions (which are often preferred to a more general formulation because they are easier to handle). Thereafter we move on to a specific graphic technique of presenting the production function, the so-called factor diagram. With the aid of this, another graphic tool, the box diagram, can be constructed, which allows us to take both commodity and factor markets into account simultaneously. From the box diagram the production possibility curve may be derived, and this shows all the combinations of (two) goods that an economy can produce with given resources. If this is combined with social indifference curves (showing the preferences of society) and relative commodity prices we may shed light on the interaction between production (supply) and demand.

Suggested Citation

  • Hans C. Blomqvist & Mats Lundahl, 2002. "Some Analytical Tools," Palgrave Macmillan Books, in: The Distorted Economy, chapter 2, pages 13-38, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-4039-1434-7_2
    DOI: 10.1057/9781403914347_2
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