Page 345 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 22.5 The Optimum Condition of Product Substitution

It is necessary for the optimum condition of product substitute that for any person who uses any two
objects (for society) transferring rate is equal to conversion transferring rate. It means that maximum
rate of transferring is equal to maximum rate of any two objects. It is shown in Fig. 22.5. Suppose
that curve a AB is the community transformation curve between two objects X and Y. In this figure
considering O X and O Y are two axes, two objects personal conusmers' neutral curves I and I are
1 1
1
2
1 1
shown.
Suppose that production occurs on L where X produces ON quantity and Y produces NL quantity and
consumer buys O M of X and ML of Y. But L is not the optimum point because the MRT is not equal to
1
MRS on it. AB and I curves do not touch each other. Change from E to L and make AB and I curves
1
2
equal. Thus point E indicates optimum condition for both producer and consumer because MRS = MRT.
It means that rate on which producer is to ready to keep replacing of products X and Y equal to that rate
by which X can change to Y.
According to the figure, when the consumer comes above the neutral cruve I which at point E is the
2
tangentias to transfering curve then, from the quantity OG of X and GE of Y produced by society,
consumer consumes O F of X and FE of Y. The last quantity OB of Y and GE of Y is remained for the
1
cosumers of the rest of the society.
Fig. 22.5

Y
1
A L
Product-Y E l

O l 1 2 X
1 1
M F
O R N G B
Product-X

22.6 The Optimum Condition for Intensity of Factor Use

In the given period, the relation of a factor relates to its optimum distribution. For this, it is necessary
that the transferring rate between wages of works and substitution maximum rate hour of works and
maximum rate of transferring should be equal. On given period, one would feel problem to choose
kindly and uses. If he uses holiday then he earns less. In reverse due to the relation between income and
holiday so it has a neutral map which indicates different parts. Neutral curve indicates maximum rate
of substitution between holiday and income. Likewise, factor unit object of each owner and factor unit
helping in production, we consider time is a transferring curve. For this condition work and holiday
the maximum of substitution, maximum rate of transformation between work and object is should
be equal. If between work and holiday rate of maximum substitution work and object is greater than
maximum rate 0, so time unit of factor unit transferring curves for holiday, production can be increased.
Optimal condition comes on that times when the prize factor should be paid to owner factor is equal to
the value of marginal productivity. It has cleared with the help of Fig. 22.6.

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