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Unformatted text preview: on of one good,
rather than another
– Increasing the production of one good eventually requires using
inputs that are poorly suited for that good’s production. • RPT represents how much X can be traded for Y while
keeping inputs K and L productively employed.
• RPT is equal to the ratio of marginal costs of production. • Differing factor intensity – At every point on the PPF, K and L are efficiently employed
– By definition, this means that costs are minimized.
– Since inputs are in fixed supply, minimum costs of producing X
and Y will be constant.
Lecture 17 Lecture 17 Econ 11--Spring 2001 – Increasing output of X raises its marginal cost.
– Increasing output of Y raises its marginal cost. – X and Y may require K and L in different proportions.
– Then, even under constant returns to scale and non-specialized
inputs, making more of X or Y may require the use of relatively
more of the less intensively required factor, raising marginal costs.
23 Lecture 17 Econ 11--Spring 2001 24 4 Prof. Jay Bhattacharya Econ 11--Spring 2001 Equilibrium in Two Good
Economy PPF, Consumer Utility and Prices
At these prices, there is
excess demand for X
and excess supply of Y.
Px should increase and
Py should decrease. Y
Sy Y Y* Dy
U(X, Y) U(X, Y)
Slope = Px*/Py* Slope = Px/Py
Lecture 17 Dx X* X Econ 11--Spring 2001 25 Lecture 17 Econ 11--Spring 2001 X
26 Properties of Equilibrium
MC x MU x
= RTS =
MC y MU y • At P*x and P*y, both product markets clear.
• Profits and utility are maximized.
• Labor and capital are efficiently used since
final consumption is on the PPF.
• Profits equal zero. (Need to discuss input
markets to show this).
Lecture 17 Lecture 17 Econ 11--Spring 2001 27 5...
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- Perfect Competition