OMOLADE AYOMIDE

ADESINA DAMILOLA
AMMADIKKO PATIENCE
OLANIPEKUN OREOLUWA
ABBE IYEGBEKOSA JOSHUA

COURSE: ECN 401 GROUP PRESENTATION

TOPIC: TRANSFORMATION AND CONTRACT CURVE
LECTURER: DR. OSAKEDE
 TRANSFORMATION AND CONTRACT CURVE
In microeconomics, the transformation curve is a graphical representation of
the maximum amount of one good that can be produced for every possible level
of production of the other good, given the available resources and technology. It
is also known as the production possibility frontier (PPF). The slope of the
transformation curve is the marginal rate of transformation (MRT), which
represents the rate at which one good can be exchanged for another while
maintaining the same level of total production.
It can also be defined as production transformation curve or a production
possibility curve, which is a graphical representation of the trade-offs between
two goods that an economy can produce using its given resources and
technology. The production possibility curve typically shows the maximum
quantity of one good that can be produced for each possible quantity of the
other good, given the existing state of technology and the resources in the
economy.
 Graphically bounding the production set for fixed input quantities, the PPF
curve shows the maximum possible production level of one commodity for any
given production level of the other, given the existing state of technology. By
doing so, it defines productive efficiency in the context of that production set: a
point on the frontier indicates efficient use of the available inputs (such as
points B, D and C in the graph), a point beneath the curve (such as A) indicates
inefficiency, and a point beyond the curve (such as X) indicates impossibility.
PPFs are normally drawn as bulging upwards or outwards from the origin
("concave" when viewed from the origin), but they can be represented as
bulging downward (inwards) or linear (straight), depending on a number of
assumptions.
An outward shift of the PPC results from growth of the availability of inputs,
such as physical capital or labour, or from technological progress in knowledge
of how to transform inputs into outputs. Such a shift reflects, for
instance, economic growth of an economy already operating at its full
productivity (on the PPF), which means that more of both outputs can now be
produced during the specified period of time without sacrificing the output of
either good. Conversely, the PPF will shift inward if the labour force shrinks,
the supply of raw materials is depleted, or a natural disaster decreases the stock
of physical capital.

Key Concepts:
Opportunity Cost: The slope of the production possibility curve represents the
opportunity cost of producing one good in terms of the other. As you move
along the curve, resources are shifted between the production of the two goods,
indicating the trade-off.
Efficiency: Points on the curve represent efficient use of resources, where all
resources are utilized, and any point inside the curve indicates underutilization
or inefficiency.
Scarcity: The curve emphasizes the concept of scarcity by illustrating that
resources are limited, and choices must be made about what to produce.
Shape of the Curve:
Concave Shape: The curve is often concave (bowed outward) due to the law of
diminishing returns. As resources are shifted from one good to another, the
opportunity cost increases.
Linear Shape: In some simplified models, the curve may be linear, indicating a
constant opportunity cost.
Shifts in the Curve:
Technological Advancements: If there are improvements in technology, the
production possibility curve may shift outward, indicating an increase in the
overall production capacity of the economy.
Changes in Resources: An increase in available resources, such as labor or
capital, can also shift the curve outward.
Specialization: Specialization and trade can lead to more efficient resource
allocation, allowing the economy to produce beyond its original curve.
Inefficiency and Unattainability:
Points Inside the Curve: Represent underutilization of resources, as the
economy is not operating at its full potential.
Points Outside the Curve: Are unattainable given current resources and
technology. To reach these points, there must be improvements in resources or
technology.
Government Intervention:
Policies: Government policies, such as subsidies, taxes, or regulations, can
influence the shape and position of the production possibility curve.
Real-World Considerations:
Dynamic Nature: The real-world economy is dynamic, with changes in
technology, resources, and institutions. This dynamism is not always captured in
a static production possibility curve.
Multiple Goods: In reality, economies produce a wide range of goods and
services, making the analysis more complex.

CONTRACT CURVE
In microeconomics, the contract curve or Pareto set[1] is the set of points
representing final allocations of two goods between two people that could occur
as a result of mutually beneficial trading between those people given their initial
allocations of the goods. All the points on this locus are Pareto
efficient allocations, meaning that from any one of these points there is no
reallocation that could make one of the people more satisfied with his or her
allocation without making the other person less satisfied. The contract curve is
the subset of the Pareto efficient points that could be reached by trading from
the people's initial holdings of the two goods.
It is drawn in the Edgeworth box diagram shown here, in which each
person's allocation is measured vertically for one good and horizontally for the
other good from that person's origin (point of zero allocation of both goods);
one person's origin is the lower left corner of the Edgeworth box, and the other
person's origin is the upper right corner of the box. The people's initial
endowments (starting allocations of the two goods) are represented by a point in
the diagram; the two people will trade goods with each other until no further
mutually beneficial trades are possible. The set of points that it is conceptually
possible for them to stop at are the points on the contract curve.

Octavio and Abby, who consume two goods X and Y of which there are fixed
supplies, as illustrated in the above Edgeworth box diagram. Further, assume an
initial distribution (endowment) of the goods between Octavio and Abby and let
each have normally structured (convex) preferences represented by indifference
curves that are convex toward the people's respective origins. If the initial
allocation is not at a point of tangency between an indifference curve of Octavio
and one of Abby, then that initial allocation must be at a point where an
indifference curve of Octavio crosses one of Abby. These two indifference
curves form a lens shape, with the initial allocation at one of the two corners of
the lens. Octavio and Abby will choose to make mutually beneficial trades —
that is, they will trade to a point that is on a better (farther from the origin)
indifference curve for both. Such a point will be in the interior of the lens, and
the rate at which one good will be traded for the other will be between the
marginal rate of substitution of Octavio and that of Abby. Since the trades will
always provide each person with more of one good and less of the other, trading
results in movement upward and to the left, or downward and to the right, in the
diagram.

Graphical Representation:
Edgeworth Box: The most common graphical representation of the contract
curve is in an Edgeworth Box, a diagram used to illustrate the potential
allocations of two goods between two individuals.
Axes: The two axes of the box represent the quantities of the two goods being
exchanged.
Initial Endowments: The initial positions of the individuals or firms are marked
on the edges of the box, and the contract curve shows the points where they
agree to trade.
Mutual Benefit:
The contract curve is derived from the pursuit of mutual benefit. It identifies the
points at which both parties are better off as a result of trade.
Conditions for a Contract Curve:
Preferences: The individuals or firms involved must have different preferences
or valuations for the goods being exchanged.
Scarcity: There must be some degree of scarcity or difference in the initial
endowments of the goods.

Shape of the Curve:

Bow-Shaped: The contract curve is typically bow-shaped due to the fact that, as
trade occurs, both parties move towards points of higher utility or satisfaction.
Origin: The point at the origin (where both individuals start) is generally not
part of the contract curve because it represents the initial allocation, and no
trade occurs at that point.
Efficiency and Pareto Optimality:
The contract curve represents points of Pareto optimality, meaning that no
further trade can occur without making one party worse off.
Any point inside the contract curve is Pareto inefficient, as there exists an
opportunity for both parties to be better off through trade.
Shifts and Changes:
Technological Changes: Changes in technology or endowments can shift the
contract curve.
Preferences: Changes in preferences or valuations can also lead to shifts.

CONCEPT OF GENERAL EQUILIBRIUM

General equilibrium theory, or Walrasian general equilibrium, attempts
to explain the functioning of the macroeconomy as a whole, rather than as
collections of individual market phenomena.
The theory was first developed by the French economist Leon Walras in the late
19th century. It stands in contrast with partial equilibrium theory, or Marshallian
partial equilibrium, which only analyzes specific markets or sectors.
Walras developed the general equilibrium theory to solve a much-debated
problem in economics. Up to that point, most economic analyses only
demonstrated partial equilibrium—that is, the price at which supply equals
demand and markets clear—in individual markets. It was not yet shown that
equilibrium could exist for all markets at the same time in aggregate.
General equilibrium theory tried to show how and why all free markets
tend toward equilibrium in the long run. The important fact was that markets
didn't necessarily reach equilibrium, only that they tended toward it. As Walras
wrote in 1889, “The market is like a lake agitated by the wind, where the water
is incessantly seeking its level without ever reaching it.”
General equilibrium theory builds on the coordinating processes of a free
market price system, first widely popularized by Adam Smith's "The Wealth of
Nations" (1776). This system says traders, in a bidding process with other
traders, create transactions by buying and selling goods. Those transaction
prices act as signals to other producers and consumers to realign their resources
and activities along more profitable lines.
Walras, a talented mathematician, believed he proved that any individual market
was necessarily in equilibrium if all other markets were also in equilibrium.
This became known as Walras’s Law.