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

 
Rule Two 
states that ―the marginal rate of transformation between 
any factor and any product must be the same for any pair of firms 
using the factor and producing th
e product.‖ It means that the 
marginal productivity of any factor in producing a particular product 
must be the same for all firms. A firm under perfect competition will 
employ a factor of production up to the point at which its marginal 
value product (VMP) equals its price. If MP is the marginal physical 
product of factor L (labour) in the production of commodity X in firm 
A, then its IMP is the marginal physical productivity multiplied by 
the price of X, i.e. 
A
XL
X
MP
MP
P
. Thus the price of labour (P
L
) in 
firm A is
A
L
XL
X
P
MP
P
or
A
L
X
XL
P / P
MP
------------------- (1) 
Similarly in firm B the price of labour is

---

B
L
XL
X
P
MP
P
or
B
L
X
XL
P / P
MP
-------------------- (2) 
Since the price of the product (P
X
) and the price of labour 
(P
L
) are the same in both the firms, each firm will equate its 
marginal physical productivity to P
L
/P
X.
Thus from equations (1) and (2), we have
 
 
 
Thus in equilibrium each firm has the same marginal 
physical productivity of factor L in producing the same product X. 
Rule Three 
for efficiency in production requires that ―the marginal 
rate of transformation (MRT) between any two products must be 
the same for any two firms that produce both.‖ This condition 
requires that if there are two firms A and B, and both produce two 
products X and Y, then
A
B
XY
XY
MRT
MRT
. A profit maximising firm 
under perfect competition will be in equilibrium when the iso-
revenue line is tangent to its transformation curve. It means that for 
equilibrium the marginal rate of transformation between two 
products 
X 
and Y 
must 
equal 
their 
price 
ratio, 
i.e.
XY
X
Y
MRT
P / P
.
. 
Thus the optimum condition in the case of firm A will be
A
XY
X
Y
MRT
P / P
. And in the case of the firm B it will be
B
XY
X
Y
MRT
P / P
.Thus
A
B
XY
XY
X
Y
MRT
MRT
P / P
.