Analysis Of The Edgeworth Box
The Edgeworth Box was developed by Francis Edgeworth, who later published his findings in his work, “Mathematical Psychics: an Essay on the Application of Mathematics to the Moral Sciences” in the late 1800’s (Fraley). Ultimately, the Edgeworth Box is a common and extremely useful tool in general equilibrium analysis, in which the box can be used to analyze the trading of goods and market efficiency (General Equilibrium I: Exchange). More specifically, the Edgeworth Box allows for the study of the interaction between two individuals who are trading two different goods within an economy. By merging the indifference maps between the two parties, the Edgeworth Box can be used to illustrate how both parties in a trade can arrive at a mutually beneficially consumption bundle (General Equilibrium I: Exchange).
…show more content…
It also assumes that the individuals are participating in an economy with no additional production opportunities and with economic activity consisting solely of trading and consumption (Balisico). It further assumes individuals possess endowments (the combined total endowment for both individual A and B is represented by “w”). It is also assumed that both individual A and B act as “price takers” (Balisico).
The Edgeworth Box shows nearly all possible consumption bundles as well as the utility and preferences of both individuals to those bundles. One of the main goals off the box is to determine if it is possible to make either, or both individual A and, or B better off through the process of trade/exchange given their initial endowments, utility, preferences and indifferences curves (General Equilibrium I: Exchange) (See Figure
It also assumes that the individuals are participating in an economy with no additional production opportunities and with economic activity consisting solely of trading and consumption (Balisico). It further assumes individuals possess endowments (the combined total endowment for both individual A and B is represented by “w”). It is also assumed that both individual A and B act as “price takers” (Balisico).
The Edgeworth Box shows nearly all possible consumption bundles as well as the utility and preferences of both individuals to those bundles. One of the main goals off the box is to determine if it is possible to make either, or both individual A and, or B better off through the process of trade/exchange given their initial endowments, utility, preferences and indifferences curves (General Equilibrium I: Exchange) (See Figure