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The Edgeworth Box

The Edgeworth Box. The Basic Theorem. The basic theorem in welfare economics: A market, exchange, economy will achieve efficient resource allocation . We intend to show the basics of that proof. Some Basic Assumptions. A simple economy:Harry and Sally. Some Basic Assumptions.

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The Edgeworth Box

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  1. The Edgeworth Box Lectures in Microeconomics-Charles W. Upton

  2. The Basic Theorem • The basic theorem in welfare economics: A market, exchange, economy will achieve efficient resource allocation. • We intend to show the basics of that proof. The Edgeworth Box

  3. Some Basic Assumptions • A simple economy:Harry and Sally. The Edgeworth Box

  4. Some Basic Assumptions • A simple economy:Harry and Sally. • There are two factors of production, capital, K, and labor, L. L = LH + LS The Edgeworth Box

  5. Some Basic Assumptions • A simple economy:Harry and Sally. • There are two factors of production, capital, K, and labor, L. L = LH + LS • These two factors of production can be used to produce either apples or bananas. The Edgeworth Box

  6. Three Basic Questions • How many apples and how many bananas should be produced? The Edgeworth Box

  7. Three Basic Questions • How many apples and how many bananas should be produced? • How should the apples and bananas be allocated between Harry and Sally? The Edgeworth Box

  8. Three Basic Questions • How many apples and how many bananas should be produced? • How should the apples and bananas be allocated between Harry and Sally? • How should capital and labor be allocated to the production of apples and bananas? The Edgeworth Box

  9. The Edgeworth Box Apples The Edgeworth Box

  10. The Edgeworth Box Apples Bananas The Edgeworth Box

  11. The Edgeworth Box Apples Sally Bananas Harry The Edgeworth Box

  12. The Edgeworth Box Sally Sally’s Bananas Harry’s Bananas Harry Harry’s Apples Sally’s Apples The Edgeworth Box

  13. The Edgeworth Box Sally bs aH aS bH Harry The Edgeworth Box

  14. Indifference Curves for Harry Apples Sally Bananas Harry The Edgeworth Box

  15. Indifference Curves for Sally Apples Sally Bananas Harry The Edgeworth Box

  16. Indifference Curves for Both Apples Sally C Bananas B A Harry The Edgeworth Box

  17. The Points of Tangency Apples The Contract Curve Sally C Bananas B A Harry The Edgeworth Box

  18. The Contract Curve Apples Sally Bananas Harry The Edgeworth Box

  19. The Core Apples Sally Points in yellow area (the Core) make Harry and Sally better off. Bananas Harry The Edgeworth Box

  20. More on the Core Apples Points on black portion of contract curve are Pareto Optimum. Sally Points in yellow area (the Core) make Harry and Sally better off. Bananas Harry The Edgeworth Box

  21. Getting There Apples Points on black portion of contract curve are Pareto Optimum. Sally Harry and Sally will move to the contract curve via voluntary exchange. Points in yellow area (the Core) make Harry and Sally better off. Bananas Harry The Edgeworth Box

  22. Getting There Apples Points on black portion of contract curve are Pareto Optimum. Sally Harry and Sally will move to the contract curve via voluntary exchange. Points in yellow area (the Core) make Harry and Sally better off. Here, they will end up along the black portion of the line Bananas Harry The Edgeworth Box

  23. Pareto Optimality When Harry and Sally are on the contract curve, we say that they have achieved Pareto Optimality, the economist’s equivalent of “bliss”. Apples Sally Bananas Harry The Edgeworth Box

  24. Pareto Optimality When Harry and Sally are on the contract curve, we say that they have achieved Pareto Optimality, the economist’s equivalent of “bliss”. Apples Sally Bananas Harry The Edgeworth Box

  25. Pareto Optimality When Harry and Sally are on the contract curve, we say that they have achieved Pareto Optimality, the economist’s equivalent of “bliss”. Apples Sally Bananas It is impossible to make Harry better off without making Sally worse off (or vice versa) Harry The Edgeworth Box

  26. Pareto Optimality When Harry and Sally are on the contract curve, we say that they have achieved Pareto Optimality, the economist’s equivalent of “bliss”. Apples Sally If they are not on the contract curve, it is possible to make one or both better off without making the other worse off. Bananas It is impossible to make Harry better off without making Sally worse off (or vice versa) Harry The Edgeworth Box

  27. End ©2006 Charles W. Upton The Edgeworth Box

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