32 MULTIPLE PURPOSE RIVER DEVELOPMENT 



point, increasing output would add more to revenues than to costs. 

 At a level of output where price and marginal costs are equated, 

 all possibilities for increasing profits by any adjustments would be 

 realized. Beyond that point, every additional unit of output valued 

 at market prices would provide less in revenue than it added 

 in cost. 



The proposition that equilibrium of a producer is determined 

 by the level of output at which his marginal costs equal product 

 prices, and that the marginal rates of substitution among factors 

 are equal to the ratios of their prices, holds for any firm producing 

 any product. Furthermore, granted the assumptions of the com- 

 petitive model, these are necessary conditions for general economic 

 efficiency, and can be rationalized as follows. 



If there is perfect competition in product markets, the established 

 prices reflect the marginal valuations of consumers in the aggre- 

 gate, given their preferences, the distribution of income, and the 

 amount and composition of total output. The resulting constella- 

 tion of prices guides producers in their decisions regarding the 

 production rate for any line. Output is expanded (or contracted) 

 in every line of production so long as the cost incurred for the 

 marginal unit is below (or above) the community's valuation at 

 the margin (the price) of the additional unit of product. If perfect 

 competition exists in factor markets also, the price of factors reflects 

 their opportunity costs, or the returns at the margin in alternative 

 uses. Marginal costs thus reflect the opportunities the community 

 must forego to ensure the marginal unit of any particular product. 

 Where marginal costs are all equal to the respective product prices, 

 and marginal rates of substitution equal to the ratio of factor 

 prices, the value of every factor is the same at the margin in every 

 application. Therefore, no possibility remains that, by any changed 

 combination of factors or reallocation of resources, any consumer 

 or producer can improve his position without adversely affecting 

 another's. In short, there is no further possibility of achieving a 

 net gain from any reorganization, given the distribution of income, 

 the preferences of consumers, and the resources at the disposal of 

 the community. 



FACTOR ALLOCATION OVER TIME: THE CAPITAL MARKET 



Up to this point, the question of efficient allocation of resources 

 has been treated as though the resources at the disposal of society 



