A Diagrammatic Representation of the Policy of Accounting Prices

Accounting prices are defined as the set of prices of factors such that if the production is carried out at cost calculations according to these prices, it will lead to the introduction of the optimal technology which will lead to the maximisation of total value of output given the community's preference schedule and factor endowment. In other words, the accounting prices of factors are the set of prices which are in equilibrium with the optimal technology as defined above. In what follows, we shall consider only the basic factors of production, labour (L) and capital (K). For the sake of simplicity we shall assume that the taste of the community does not change, that is, the relative quantities of the final commodities produced remain unchanged, so that all the commodities can be expressed in terms of one commodity, i.e., the national product (P). Further we shall base our discussion on a system of continuous production functions represented by convex production contours, each curve representing one level of production and a higher one a larger level.