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Unit-22: Marginal Conditions of Paretian Optimum

Notes
Fig. 22.6

L
T
P

I
2
I
1
O C

TC is transformation curve of work and production. Supposing C as a zero point of factor, factor units
on parallel axis from right to left have measured horizontally. Production unit has measured vertically.
So, TC curve indicates transformation between decreasing maximum rate of work and production.
On the other hand, each neutral curve indicates different income with work and holiday. In this
condition, income is measured on horizontal axis and holiday in hours is on vertical axis. Convexity
of neutral curve indicates decreasing maximum rate of substitutions between income and holiday.
This maximum condition accepts on that points where transformed curve and neutral curve both are
tangent. That means their slopes are same. It is clear that L point is not point of optimum condition
because on this point TC and I intersect each other. Maximum rate of substitution between income
1
and holiday and maximum rate of transformation between work and production are same when a
person goes above the neutral curve I where curve I curve TC meet each other point P. In this way
2
this condition is satisfied at point P.

22.7 The Optimum Intertemporal Condition

It is important for this condition that, “The short term maximum rate of transferred between the
pair of factors and object and between pair of each factor and between pair of objects, the short term
maximum rate of substitutes is equal to interest on hiring without risk of securities.” So, in absence
of risk and uncertainty, if this condition is related to give or take loan analyzing producer. The
meaning proof of this condition is that the rate of interest, on which individual product, quantity of
capital is ready to take loan for taking loan producer the capital maximum productions should be
equal. It can be cleared with the help of Fig. 22.6. It measures parallel axis in the form of income and
vertical axis is in form of buying capability. On separate different time, I and I is neutral curve of
2
1
time on different income stage with personal loan giver. It indicates decreasing maximum rate of
substitution between income of present and future on neutral curve of each point. It means that on
that each unit of income of a person wants high premium whose he leave for uses. TC is the time
production possibility curve of personal loan. On this concave through time on each point indicates
decreasing maximum rate of capital. This condition satisfies that rime when time neutral curve and
time product possibility curve tangent to each other. Because both curve cuts each other on L, so
this cannot be the point of optimum condition. Point P indicates optimum condition because on this
point the slopes are equal on TC and I .
2

Give your thought on short-term optimum condition.

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