INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2012; 1 Edgeworth Box 0Labor X L X Capital X K X Suppose we look at the production possibilities for good X Then this may represent an isoquant for good X (e.g. combinations of capital and labor producing 1 X) Similarly, this may be another isoquant for good X (e.g. producing 1.5 X) X=1 X=1.5

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2012; 2 0Labor Y L Y Capital Y K Y We might, however, also use our capital and labor to produce Something else, say good Y. Just as with good X we can draw combinations of inputs, capital Y and labor Y, to produce a certain level of good Y. For example, the isoquants Y=2 and Y=3 in this figure. Y=2 Y=3 Edgeworth Box

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2012; 3 Combining these two possibilities the figure on the left represents isoquants for good X and the figure on the right isoquants for good Y 0 LXLX KXKX 0 LYLY KYKY Edgeworth Box

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2012; 4 We can combine the information of these two figures into one figure Edgeworth Box 0 LXLX KXKX 0 LYLY KYKY

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2012; 5 We can combine the information of these two figures into one figure Edgeworth Box 0 LXLX KXKX 0 LYLY KYKY

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2012; 6 We can combine the information of these two figures into one figure Edgeworth Box 0 LXLX KXKX 0 LYLY KYKY

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2012; 7 We can combine the information of these two figures into one figure Edgeworth Box 0 LXLX KXKX 0 LYLY KYKY

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2012; 8 We can combine the information of these two figures into one figure Edgeworth Box 0 LXLX KXKX 0 LYLY KYKY

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2012; 9 The origin of good X is in the south- west corner LxLx KxKx OxOx LyLy KyKy OyOy A The origin of good Y is in the north- east corner L x and K x are measured relative to the O x corner L y and K y are measured relative to the O y corner Edgeworth Box

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2012; 10 LxLx KxKx OxOx LyLy KyKy OyOy L K We let K be the available capital and L the available labor Point A is not an efficient allocation of K and L for the production of X and Y This follows from the upper contour set of good Y at point A A Edgeworth Box

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2012; 11 LxLx KxKx OxOx LyLy KyKy L K A Moving K from X to Y and L from Y to X The combination of all efficient input allocations is called the contract curve Edgeworth Box Can increase the production of X without lowering the prod. of Y OyOy

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2012; 12 To test whether you understand the Edgeworth Box and the properties of CRS try to derive the special circumstances under which the ppf is a straight line (there are two distinct special cases). X Y Otherwise, the ppf is a strictly function, that is take 2 arbitrary points on the ppf, such as A and B in the figure Connect them with the red straight line, then the value of the ppf must be everywhere above this red straight line As a consequence the production possibility set is that is all points in between 2 arbitrary points that can be produced can also be produced A B concave convex, Edgeworth Box