Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

5.4.2 General Equilibrium of Production 
To examine general equilibrium of production with a very 
simple economy which produces only two commodities (X and Y) 
with only two inputs, labour (L) and capital (K), and no exchange. 
His allows us to present the general equilibrium of production 
graphically. 
A
B
XY
XY
MRS
MRS

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0
1
2
3
4
5
6
7
8
9
10
1
2
3
4
5
6
7
8
9
10
11
12
Labour (L)
C
a
p
it
a
l 
(K
)
FIGURE 5.3: EDGEWORTH BOX DIAGRAM FOR PRODUCTION 
In the above figure, the Edgeworth box diagram for 
production is obtained by rotating the iso-quant diagram for 
commodity Y by 180 degrees and superimposing it on the iso-quant 
diagram for commodity X in such way that the size of the box refers 
to the total amount of L and K available to the economy (12L and 
10K). Any point inside the box indicates how the total amount of the 
two inputs is utilised in the production of the two commodities.
For example, point R indicates that 3L and 8K are used in 
the production of X
1
of commodity X, and the remaining 9L and 2K 
are used to produce Y
1
of Y. Thre
e of X‘s iso-quants (convex to 
origin 0
X
) are X
1
, X
2
, and X
3
. Three of Y‘s iso-quants (convex to 
origin 0
Y
) are Y
1
, Y
2
, and Y
3
.
If this economy was initially at point R, it would not be 
maximising its output of commodities X and Y because, at point R, 
the marginal rate of technical substitution of labour for capital 
(MRTS
LK
) in the production of X (the absolute slope of X
1
) exceeds 
the MRTS
LK
in the production of Y (the absolute slope of Y
1
). By 
simply transferring 6K from the production of X to the production of 
Y and 1L from the production of Y to the production of X, the