Market- General Equilibriun curves can be drawn in on an Edgeworth box. Consumer A prefers bundles to the north-east diagram and consumer B prefers bundles to the south-west of the box. Hence the diagram looks like Clearly many more indifference be drawn onto the diagram. Hence the Edgeworth box can be used to represent preferences and feasible allocations. These are the economically relevant characteristics of the consumers for the ensuing analysis Market General Equilibriun Pareto Efficiency A Pareto efficient allocation is one where it is not possible to make better off without making another se off. The contract curve is the curve that connects all the Pareto efficient points (the dashed line) B a point like y cannot be Pareto efficient. It is possible to make consumer A better off without making B worse off. by moving to an allocation like r. A has moved onto a strictly higher indifference curve, whilst B is just as well off. Only allocations like r can be Pareto efficient, where the two indifference curves are tangential. It is not possible to make eit better off without making the other worse off. Therefore, the contract curve connects all the indifference curve tangency points.Market — General Equilibrium 3 Preferences • Indifference curves can be drawn in on an Edgeworth box. Consumer A prefers bundles to the north-east of the diagram and consumer B prefers bundles to the south-west of the box. Hence the diagram looks like: ....................................................................................................................................................................................................................................................................................................................................................................................................................... ....................................................................................................................................................................................................................................................................................................................................................................................................................... . . ........ ........ ..... . ..................... . .................................................................................................... ...................................................................................................... A B • x • ω • Clearly many more indifference curves can be drawn onto the diagram. • Hence the Edgeworth box can be used to represent preferences and feasible allocations. These are the economically relevant characteristics of the consumers for the ensuing analysis. Market — General Equilibrium 4 Pareto Efficiency • A Pareto efficient allocation is one where it is not possible to make one consumer better off without making another worse off. The contract curve is the curve that connects all the Pareto efficient points (the dashed line). ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....................................................................................................................................................................................................................................................................................................................................................................................................................... ....................................................................................................................................................................................................................................................................................................................................................................................................................... . . ........................................................................................................ ........................................................................................................ . .................................................................................................................. A B • x • y • A point like y cannot be Pareto efficient. It is possible to make consumer A better off without making B worse off, by moving to an allocation like x. A has moved onto a strictly higher indifference curve, whilst B is just as well off. • Only allocations like x can be Pareto efficient, where the two indifference curves are tangential. It is not possible to make either consumer better off without making the other worse off. • Therefore, the contract curve connects all the indifference curve tangency points