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

M
N
R
0
X
0
Y
1
X
3
X
2
X
1
Y
2
Y
3
Y
J
K
L

---

economy can move from point R (on X
1
and Y
1
) to point J (on X
1
and Y
3
) and increase its output of Y without reducing its output of X. 
Alternatively, this economy can move from point R to point N (and 
increase its output of X from X
1
to X
3
without reducing its output of 
Y
1
) by transferring 2K from the production of X to the production of 
Y and 6L from Y to X.. Or, by transferring 4K from the production of 
X to the production of Y and 4L from Y to X , this economy can 
move from point R (on X
1
and Y
1
) to point M (on X
2
and Y
2
), and 
increase its output of both X and Y. At points J, M, and N, an X iso-
quant is tangent to a Y iso-quant so that the MRTS
LK
in the 
production of X equals MRTS
LK
in the production of Y. 
Curve 0
X
JMN0
Y
is the contract curve of production. It is 
the locus of tangency points of the iso-quants for X and Y at which 
the marginal rate of technical substitution of labour for capital is the 
same in the production of X and Y. That is, the economy is in 
general equilibrium of production when 
……………… (5.2) 
Thus, by simply transferring some of the given and fixed 
amounts of available L and K between the production of X and Y, 
this economy can move from a point not on the contract curve for 
production to a point on the curve and increase its output of either 
or both commodities. Once on its production contract curve, the 
economy can only increase the output of either commodity by 
reducing the output of the other. For example, by moving from point 
J (on X
1
and Y
3
) to point M (on X
2
and Y
2
), the economy increases 
its output of commodity X (by transferring 3L and 2K from the 
production of Y to the production of X), but its output of commodity 
Y falls. For an economy of many commodities and many inputs, the 
general equilibrium or production occurs where the marginal rate of 
technical substitution between any pair of inputs is the same for all 
commodities and producers using both inputs.