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

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.

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

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

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

6. The Edgeworth Box Three Basic Questions 1.How many apples and how many bananas should be produced?

7. 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?

8. 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?

9. The Edgeworth Box Apples

10. The Edgeworth Box Apples Bananas

11. The Edgeworth Box Apples Bananas Harry Sally

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

13. The Edgeworth Box Harr y Sally aHaH aSaS bHbH bsbs

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

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

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

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

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

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

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

21. The Edgeworth Box Getting There Harry Sally Apples 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.

22. The Edgeworth Box Getting There Harry Sally Apples 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

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

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

25. The Edgeworth Box Pareto Optimality Harry Sally Apples 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)

26. The Edgeworth Box Pareto Optimality Harry Sally Apples 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.

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