Adjust Equation Contract For Free

An Edgeworth box (named after Irish philosopher and economist Francis Ysidro Edgeworth, 1881) is a two-dimensional representation of a simple, closed economy consisting of two individuals and two items (or resources) that are finite in supply.

In an Edgeworth box the contract curve is the set of tangency points between the indifference curves of the two consumers. It is termed the contract curve since the outcome of negotiation about trade between two consumers should result in an agreement (a 'contract') that has an outcome on the contract curve.

Thus (XA ,YA ) = wA and (XB , YB ) = wB where wA and wB represents A's and B's initial endowments (or income). The height of the Edgeworth box represents the total amount of commodity 'Y' available and the width of the Edgeworth box represents the total amount of commodity 'X' available.

A common tool in general equilibrium analysis is the Edgeworth boxwhich allows for the study of the interaction of two individuals trading two different commodities. Production is taken as a given and represented by an initial endowment of goods in possession of the two individuals .

In an Edgeworth box the contract curve is the set of tangency points between the indifference curves of the two consumers. It is termed the contract curve since the outcome of negotiation about trade between two consumers should result in an agreement (a 'contract') that has an outcome on the contract curve.

Edgeworth diagram is divided into two types. The horizontal side of the box measures a fixed total output of good 1 and the vertical side measures a fixed total output of good 2. Individual 1's consumption of good 1 is measured horizontally from the origin at o1. His/ her consumption of good 2 is vertical from o1.

The set of Pareto-efficient allocations can be revealed in an Edgeworth box as a contract curve that runs between the origin corners (o and o2032) through all of the points where indifference curves meet tangentially. Note that while each allocation on such a curve is efficient, it is not necessarily equitable!