Efficiency Between Production and Consumption
The relation between production and consumption in a simple seven equation model (2x2x2 model) can be shown graphically. In the diagram below, the aggregate production possibility frontier, labeled PQ shows all the points of efficiency in the production of goods X and Y. If the economy produces the mix of good X and Y shown at point A, then the marginal rate of transformation (MRT), X for Y, is equal to 2.
Point A defines the boundaries of an Edgeworth box diagram of consumption. That is, the same mix of products that are produced at point A, can be consumed by the two consumers in this simple economy. The consumers' relative preferences are shown by the indifference curves inside the Edgeworth box. At point B the marginal rate of substitution (MRS) is equal to 2, while at point C the marginal rate of substitution is equal to 3. Only at point B is consumption in balance with production (MRS=MRT). The curve 0BCA (often called the contract curve) inside the Edgeworth box defines the locus of points of efficiency in consumption (MRS1=MRS ²). As we move along the curve, we are changing the mix of goods X and Y that individuals 1 and 2 choose to consume. The utility data associated with each point on this curve can be used to create utility functions.
Read more about this topic: Welfare Economics
Famous quotes containing the words production and consumption, efficiency, production and/or consumption:
“Production and consumption are the nipples of modern society. Thus suckled, humanity grows in strength and beauty; rising standard of living, all modern conveniences, distractions of all kinds, culture for all, the comfort of your dreams.”
—Raoul Vaneigem (b. 1934)
““Never hug and kiss your children! Mother love may make your children’s infancy unhappy and prevent them from pursuing a career or getting married!” That’s total hogwash, of course. But it shows on extreme example of what state-of-the-art “scientific” parenting was supposed to be in early twentieth-century America. After all, that was the heyday of efficiency experts, time-and-motion studies, and the like.”
—Lawrence Kutner (20th century)
“[T]he asphaltum contains an exactly requisite amount of sulphides for production of rubber tires. This brown material also contains “ichthyol,” a medicinal preparation used externally, in Webster’s clarifying phrase, “as an alterant and discutient.””
—State of Utah, U.S. public relief program (1935-1943)
“Books constitute capital. A library book lasts as long as a house, for hundreds of years. It is not, then, an article of mere consumption but fairly of capital, and often in the case of professional men, setting out in life, it is their only capital.”
—Thomas Jefferson (1743–1826)