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

6.5 SUMMARY 
 
1. Pareto optimality criteria refer to economic efficiency which 
can be objectively measured. According to this criterion, any 
E
A
B
c
Y
1
X
1
P
P
1
IC
1
IC
2
c
O

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change that makes at least one individual better off and no 
one worse off is an improvement in social welfare, conversely 
a change that makes no one better off and at least one worse 
off is a decrease in social welfare. 
2. For the attainment of Pareto optimal situation in an economy, 
three marginal conditions are to be satisfied i.e. (a) efficiency 
of distribution of commodities among the consumers 
(efficiency in exchange), (b) efficiency of the allocation of the 
factors among firms (efficiency of production), (c) efficiency in 
the allocation of factors among commodities (efficiency in 
product mix or composition of product) 
3. All buyers and sellers of goods and services must have perfect 
knowledge about market conditions, returns to scale must be 
constant and all factors must be perfectly mobile so that all 
producers earn only normal profits. Thus these requirements 
of perfect competition are necessary for the satisfaction of the 
marginal conditions. 
4. Under perfect competition every consumer aims at maximising 
his utility, he will equate his MRS for two goods, X and Y to 
their price ratio (P
X
/ P
Y
). 
5. Given the prices of the two factors, a firm is in equilibrium 
under perfect competition when the slope of an iso-quant 
equals the slope of the iso-cost line. 
6. 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. 
7. A profit maximising firm under perfect competition will be in 
equilibrium when the iso-revenue line is tangent to its 
transformation curve. 
8. Pareto optimality under perfect competition also requires that 
the marginal rate of substitution between two products must 
equal the marginal rate of transformation between them.