lectures in microeconomics-charles w. upton the edgeworth box
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Lectures in Microeconomics-Charles W. Upton
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.
The Edgeworth Box
Some Basic Assumptions
• A simple economy:Harry and Sally.
The Edgeworth Box
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
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
Three Basic Questions
1. How many apples and how many bananas should be produced?
The Edgeworth Box
Three Basic Questions
1. How many apples and how many bananas should be produced?
2. How should the apples and bananas be allocated between Harry and Sally?
The Edgeworth Box
Three Basic Questions
1. How many apples and how many bananas should be produced?
2. How should the apples and bananas be allocated between Harry and Sally?
3. How should capital and labor be allocated to the production of apples and bananas?
The Edgeworth Box
The Edgeworth BoxApples
The Edgeworth Box
The Edgeworth BoxApples
Bananas
The Edgeworth Box
The Edgeworth BoxApples
Bananas
Harry
Sally
The Edgeworth Box
The Edgeworth Box
Harry
Sally
Harry’s Apples Sally’s Apples
Harry’s Bananas
Sally’s Bananas
The Edgeworth Box
The Edgeworth Box
Harry
Sally
aH aS
bH
bs
The Edgeworth Box
Indifference Curves for Harry
Harry
SallyApples
Bananas
The Edgeworth Box
Indifference Curves for Sally
Harry
SallyApples
Bananas
The Edgeworth Box
Indifference Curves for Both
Harry
SallyApples
BananasA
B
C
The Edgeworth Box
The Points of Tangency
Harry
SallyApples
BananasA
B
C
The Contract Curve
The Edgeworth Box
The Contract Curve
Harry
SallyApples
Bananas
The Edgeworth Box
The Core
Harry
SallyApples
Bananas
Points in yellow area (the Core)
make Harry and Sally better off.
The Edgeworth Box
More on the Core
Harry
SallyApples
Bananas
Points in yellow area (the Core)
make Harry and Sally better off.
Points on black
portion of contract
curve are Pareto
Optimum.
The Edgeworth Box
Getting There
Harry
SallyApples
Bananas
Points in yellow area (the Core)
make Harry and Sally better off.
Points on black
portion of contract
curve are Pareto
Optimum.
Harry and Sally will
move to the contract curve via voluntary
exchange.
The Edgeworth Box
Getting There
Harry
SallyApples
Bananas
Points in yellow area (the Core)
make Harry and Sally better off.
Points on black
portion of contract
curve are Pareto
Optimum.
Harry and Sally will
move to the contract curve via voluntary
exchange.
Here, they will end up along
the black portion of the
line
The Edgeworth Box
Pareto Optimality
Harry
SallyApples
Bananas
When Harry and Sally are on the
contract curve, we say that they have achieved Pareto Optimality, the
economist’s equivalent of
“bliss”.
The Edgeworth Box
Pareto Optimality
Harry
SallyApples
Bananas
When Harry and Sally are on the
contract curve, we say that they have achieved Pareto Optimality, the
economist’s equivalent of
“bliss”.
The Edgeworth Box
Pareto Optimality
Harry
SallyApples
Bananas
When Harry and Sally are on the
contract curve, we say that they have achieved Pareto Optimality, the
economist’s equivalent of
“bliss”.
It is impossible to make Harry better off without
making Sally worse off (or vice versa)
The Edgeworth Box
Pareto Optimality
Harry
SallyApples
Bananas
When Harry and Sally are on the
contract curve, we say that they have achieved Pareto Optimality, the
economist’s equivalent of
“bliss”.
It is impossible to make Harry better off without
making Sally worse off (or vice versa)
If they are not on the contract curve, it is
possible to make one or both better off
without making the other worse off.
The Edgeworth Box
End
©2006 Charles W. Upton