welfare economics -general equilibrium of production and exchange by kaleemullah

welfare economics -general equilibrium of production and exchange by kaleemullah



this video covers general equilibrium of production and exchange now before understanding general equilibrium of production and exchange let us understand the concept of welfare first let us understand what is welfare welfare refers to satisfaction or happiness derived by an individual or society from the material things now if I suppose I have a material thing with me after consumption I get satisfied this satisfaction is known as individual welfare when we group them it is known as social welfare but the problem with the social welfare ease we find different people with a different religion different caste different Creed and also with a different gender so it is difficult to attain maximum social welfare now in order to attain maximum social welfare old welfare economists really has tried to compare different people on the basis of satisfaction it is known as inter personal comparability but the problem with the interpersonal comparability is due to friend religion people will have a different kind of satisfaction so the satisfaction differs old welfare economists have taken Cardinal utility into consideration whereas new welfare economist has taken ordinal utility into consideration now by taking ordinal utility into consideration new welfare economists wants to attain optimum conditions of production and exchange a new welfare economist has ruled out interpersonal comparability it means they're not comparing the satisfaction of a different people rather they wanted to reach the optimum conditions of a production and exchange now in order to reach the optimum conditions of production exchange new welfare economist who is also founder of welfare economics whose name is peridot peridot has laid down three conditions in order to reach optimum conditions of production and exchange condition number one is producer equilibrium which is also known as producer optimality second condition is consumer equilibrium which is also known as consumer optimality and the third condition is equilibrium of both consumer and producer Pareto says social welfare will be maximized when we attain the optimum conditions of consumer I producer now in order to understand the optimum conditions of producer and consumer first we need to understand the meaning of optimality Pareto who is a founder of welfare economics he has taken to consumers and producers into consideration to explain the concept of optimality for a Pareto optimality refers to a situation wherein it is impossible to make someone better off someone better off without making someone worse off here a is better off and B is herself so when one is better off by making other worse off it is known as optimality Pareto also says if one is better off one is better off without harming other this is not an optimality rather it is improvement rather it is known as improvement now based upon these two statements perrito who is founder of welfare economics explains the general equilibrium of production and exchange now in order to explain the general equilibrium of production in exchange first we need to understand producer equilibrium now in order to understand the producer equilibrium what we are supposed to do is we should have a little basics of ISO Khan and the slope of I so called now let me start the explanation of producer equilibrium producer attains the equilibrium or will attain the producer optimality when the slope of producer preference curve of a producer a is equal to the slope of producer preference curve of producer B now you might be wondering what is producer preference curve and what is its slope now let me explain produce a preference curve which is also known as ISO quant a curve now I so can't curve looks something like this now you might be wondering why I spoke on curve is sloping why I so can't curve is sloping downwards now let me explain first what is ISO con curve ISO count refers to various combinations of two factors which gives producers a level of output and that level of output producer fields as a maximum output na let me explain how we'll try to maximize our output by taking various factors of production into consideration now in order to produce producers takes the help of capital here I've taken washing machine and labor into consideration now when we fix output for suppose washing 500 clothes is my output when I fix this output have to fix how many capital how much of capital should I take how much of Labor should I take because I always have unlimited money with me now when I have limited money with me you're limited cash with me it is impossible to go with large amount of capital and large amount of labor so I have to restrict labor to some extent which will allow me to produce only 500 units which I feel is maximum as a producer and I have to go with the capital like two or three which will give me a 500 watching of 500 plots now in this process what actually we do is but suppose our Labor's over here now when I keep on taking more and more and more and more Labor's definitely my cash will not allow me to go with a capital so I have to lose more and more and more and more machines but definitely I have to use both of them now how much I need to take is a question now in order to answer that question I will go with the various combinations like in first combination will go with three labels to capital or I'll go with two Labor's and three capital I'll go with one labor with four capital these are the various combination so when we are shifting from one combination to another combination we are increasing one factor we are increasing one factor and we are decreasing another factor now here two factors one is increasing the other one is decreasing so therefore there is an inverse relationship between two factors does the reason the slope of the isoquant curve is sloping downwards now you might be wondering why it is in this particular shape and why it is bend the in now let me explain why it is Benton when you look at this day this particular stick is sloping downwards and it is linear it is linear because its rate is constant which means when we are fir going labor to gain capital always therefore going to labor to gain one capital when we are fir going always to labor then the curve will be linear but in this case of isoquant curve it is not linear the reason is the rate at which we are following labor to gain capital is decreasing so this particular curve will be bent if it is increasing it will be bent out it is decreasing does the reason it is bent in so this is why the slope of I so conte curve is convex to the origin the slope of slope of I so con curve slope of I so con curve is also known as marginal rate of technical substitution or it is also known as marginal rate of transformation now parados a is the slope of producer preference curve of a producer a should be equal to the slope of producer preference curve of a producer B now in order to bring it means I have a producer a and I also have producer of these preference curve I also have a producer abby's preference curve with me I also I have a producer a preference curve and also a beasts for preference curve now I should bring both of them together in order to bring both of them together perrito takes the help of Edgeworth box now when you look at Edgeworth box you might be confused how did we get this now let me make it very simple now how we are supposed to make address boxes here we have producers ace preference curve it is known as ISO concur producer B's now we have to join them have to join them in this manner now when we join them producer a which is sorry producer is indifference curve which is in blue color and produce a bc as an indifference curve of a producer it is the ISO current curve it's not an indifference curve it's an ISO count curve so ISO current curve of a producer a which is in blue color East Anjan to the ISO con curve of our producer B so when you join these a tangent points here is one tangent point it is a one tangent point here's one tangent point when you join all these tangent points will form or contract the curve this particular curve is known as contra curve and this particular curve is also known as Pareto optimality and palette OC is on this particular curve will have a optimality anywhere this side or the other side will not have a optimality optimality is only on the contract curve now in order to explain the general equilibrium of producer consumer is also known as general equilibrium of production and exchange we have to convert this particular curve into production possibility curve now let me explain how you are supposed to convert this particular curve into production possibility curve now by joining we got this curve now we have to convert this into production possibility curve a production possibility curve looks something like this C and D is a production possibility curve now when you look at this particular curve this particular curve this is one I so con this is to I so count it is a 3 I soak on now I soak on 3 has a more improvement than 2 2 has more improvement than 1 it means it's not this point is known as marginal rate of technical substitution so we are joining marginal rate of technical substitution to form the contract curve and we are taking the help of contract curve to form a production possibility curve so when we when we are telling it is an improvement of this so definitely marginal rate of substitution of this particular point of this particular point will be marginal rate of technical substitution of this particular point will be more than this particular point and this particular point will be more than this particular point so what is happening here marginal rate of technical substitution is actually increasing does the reason the production possibility curve is concave clear now on the production possibility curve on if we talk about point a or you talk about point B or your talk about point E or you talk about point F all the points will talk about optimality but which point is actually optimal with the consumer we don't know now in order to know that we have to understand the second condition of a parrot or which is known as consumer equilibrium now what is consumer equilibrium now we already know that consumer equilibrium will be attained when the slope of when the slope of indifference curve of consumer a is equal to the slope of indifference curve of a consumer B now your indifference curve is also known as consumer preference curve now it will also it will also look like the ISO font curve now if you look at indifference curve it is also same and potatoes tails when the slope of indifference curve of a consumer a is equal to the consumer B then will reach equilibrium of a production now it is consumer a and the consumer B now let us bring them together when we bring them together will again form or contract the curve when we join all these points will form a contract curve now in order to show the general equilibrium of a production in exchange one should be in the form of contract curve the other one should be in the form of production possibility curve now this production possibility curve on the consumers contract curve should be brought together in order to understand the general equilibrium of production and exchange now let me show the with a diagrammatical presentation now first you're supposed to take production possibility curve now we have we already know that every point on production possibility curve is a point of optimality or point of efficiency at which point we are supposed to take into consideration we don't know it now in order to know let us understand illustration now here I have a consumer who tells about his marginal rate of substitution it tells I am ready to forego one Y in order to consume one X and we have a producer who talks about his marginal rate of transformation and heaters am ready to forego 2y in order to produce 1x are they equal no they are not equal now we need to bring them equal it means 1 X by 1 Y should be equal to 1 X by sorry 1 1 X 1 2 1 2 y is here and here 1 X by 1 Y the both should be 1 X bar 1 Y only now let me show with the graphical presentation so I've already done production possibility curve now here we have 1 X by 2 y this point now in order to equate them we have to draw the contract curve of a consumer inside the production possibility curve I've drawn it now you have to draw the contract contract curve will be going in this direction and it will stop somewhere here so at this point not another this this point is also efficiency but it's not a efficiency of a consumer this point is not efficiency of a transit this point on the production possibility curve which will equal marginal rate of transformation and also it will equal marginal rate of substitution now if you talk about the profits and the budget of a concede profit of a producer and the budget of a consumer you can draw a budget line over here it means marginal rate of transformation is equal to marginal rate of substitution is equal to W by r which is known as budget line or a price line of a producer so when this happened the producer gives the maximum satisfy maximum production and consumer gives the maximum satisfaction and producer also gives the maximum profits when we reach that well reach and general equilibrium of production and exchange thank you reference modern economic theory KK debit all the best

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31 thoughts on “welfare economics -general equilibrium of production and exchange by kaleemullah

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  2. Great efforts put in to explain as simpler as possible , may allah bless you teacher u have done a tremendous job. Kudos to you โœŒ๏ธ๐Ÿ‘๐Ÿผ

  3. Excellent explanation with great examples… Thank you sir so much…. Please do more vedios based on advanced microeconomics and basic macroeconomics

  4. sir hats off the kind of explanation which even a layman can understand .. u really are phenomenal lookin forward to more such lectures

  5. How did an isoquant become production possibility curve..ppc also called ppf is the production possibility of the economy…this is not of a firm…the isoquant that you drew in it if we kept one factor fixed then with increase in other factor the production of that good increases but the factor which is utilized for production diminishes so this tradeoff if graphed will form ppf..not a contract curve

  6. Kudos to the explanation, one of the best videos with tremendous efforts put by the preacher. Thank you for this one.

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