Page 341 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes to production of goods and services, uses and distribution. We show the maximum condition of prof.
Rader with the help of figure.
Their Assumptions—Condition of first order depends on following assumptions—
(i) That all people are free to choose among different models and do not depend on anything while
their ordinal uses of result has given;
(ii) That each production unit has freed to others;
(iii) That it is given result to each production i.e technical knowledge has constant;
(iv) That all means is used for production of each goods;
(v) That each object is divisible;
(vi) That all people by some quantity of each object;
(vii) That each firm has tried to minimize their investment of production and maximize their
production.
(viii) That it is fully active the means of production of welfare optimum is being now describe.

Self Assessment

Fill in the blanks:
1. Each production unit has .......................... others.
2. Each goods has ......................... .
3. Means of production is totally ......................... .
4. In production of each objects, all .......................... has been used.

22.1 The Optimum Condition of Exchange

“The maximum rate of substitution or any two objects for each person should be equal. Which is he
used.” It means that maximum rate of substitution (MRS) of any two consumer products must be equal
the ratio of their price. MRS is slope of any point of curve which indicates one object. Suppose that
quantity is X which a person to remain on that curve is necessary to substitute each unit of Y.
Figure 22.1 shows the optimum condition of exchange. Take A and B are two persons who have constant
quantity of objects X and Y respectively. O is the main point of consumers and O is the main point of
a
b
B. (See Fig. 22.1) Both axes of O and O indicate vertical side of object Y and horizontal side of X. A ,
1
a
b
A and A indicate neutral map of A and B , B and B show neutral map of B. Any point of this point
3
1
3
2
2
shows possible distribution between both person and object. Take point E, Where A and B curve cut
1
1
themselves. On this condition, O Y units of Y with A and O X units with X. O Y units of Y get B and
a
a
a
a
b
b
O X units get X. On point E, the rate of substitution between both objects, is not in equal ratio with
b
b
their prices because the slope of both curves is not equal. So between two people A and B, with two
objects X and Y on point E is not the optimum condition of exchange. Let us try to find such a type of
point, where the condition of a person is better than before while the condition of others would become
worsen as before.
Suppose that A wants to take more objects of X and B wants to take more objects of Y. The condition
of each would be better and condition of others would not become worsen under high neutral curve.
Suppose that they come from point E to point R. On point R, A gets more X quantity after living some
quantity of Y while B gets more quantities of Y after coming some quantities on X. The condition of B
is not better because he lies at that neutral point but the condition of A on R is better because he arrives
from A to A respectively high neutral point. But if A and B would come from E to P that the condition
3
1
334 LOVELY PROFESSIONAL UNIVERSITY