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Unit-22: Marginal Conditions of Paretian Optimum

of A is as before because he lies on that neutral point A . The condition of B becomes better because Notes
1
he goes from B to B . Only that time when both would come on high neutral curves, when they come
1
3
from E to Q.
Fig. 22.1

X X
b
O
b
E C
Y
a Y
b
R
A
Q 3
Y A Y
2 B
P B 2 1
C
B A 1
3
O X
a a X
Therefore, P, Q and R are three points of exchange. Contract curve (CC) is the route of these touch-
points which indicate different situations of exchange which keep equality in the rate of maximum rate
of substitutions of X and Y. So on CC curve any point satisfies optimum condition of exchange. But as
CC progresses in any direction, one person became better investment of others. Therefore, in the sense
of Pareto, CC curve indicates optimum social welfare, but most social welfare, the real optimum points
leave constant. If on the point Q of CC curve both reconsits, then this is the point of maximum Social
welfare. But there is a fixd price. Obviously, according to Prof. Bolding, “In this assumption optimum
point should be placed on CC curve. It is an important decision that what people want, they must get. If
fixed price would accept then non-optimum point of pareto, like E, can be considered as this condition of
maximum social welfare.

Each person should have equal maximum rate of substitution or any two objects which
he uses.

22.2 The Optimum Condition of Factor Substitution

The condition which relates to optimum supply demands that for any two such firms, between any two
factors rate of technical substitution, should be equal by which for the production of that object these
two factors are used. On the point of equal quantity of curve maximum rate of technical substitution to
keep the standard production place of one other uses in the rate of substitution. This is shown in Fig.
22.1 above where we suppose X and Y are the two means and A and B are the two firms. Suppose A , A
2
1
and A are the isopuants of firms A and B , B and B are the isopuants of firm B. The slope of isopuants
3
3
2
1
indicates between X and Y is MRTS. Suppose that on point E, initial production is contracted. On this
stage, there are A units of object, firm A uses O X of X and O Y of Y. Likewise for production of units
1
a
a
a
a
of B of that object, firm B uses units O X and O y of X. But the maximum rate of technical substitution
b
1
b
b
b
between both factors is not equal. By the movement of touching point between disputants the optimum
condition of factor substitution is completed. CC line indicates the route of touching lines of P, Q and R.
Therefore, CC curve at any point of CC curve will use the optimum of each factor’.
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