I i 1 y y g k l two factor demand equations

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Unformatted text preview: s: n ∑L i n ∑K =L i =1 Lecture 17 Econ 11--Spring 2001 19 Demonstrating Equilibrium Lecture 17 =K Econ 11--Spring 2001 20 Production Possibility Frontier • The formal approach to demonstrating the existence of competitive equilibrium is similar to the approach in the Walras exchange economy. – – – – i i =1 Y Y = G (K , L ) Two factor demand equations; two factor prices w & r. Two product demand equations; two good prices PX and PY. Profits equal zero in competitive equilibrium. Adding all participants budgets show Walras’ Law, so only relative prices can be identified. The PPF represents the different combinations of X and Y that can be produced in the economy if K and L are not wasted. X = F (K , L ) • Instead, equilibrium will be demonstrated graphically. Lecture 17 Econ 11--Spring 2001 X 21 Lecture 17 Econ 11--Spring 2001 22 Why is the PPF Concave? Rate of Product Transformation • Diminishing returns. • The rate of product transformation is defined as (-1 times) the slope along the production possibility frontier. RPT ( X for Y ) = − • Specialized inputs dY MC X = dX MCY – Some inputs may be better suited to the producti...
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