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Edgeworth Box

The document describes an Edgeworth Box, which graphically represents the production possibilities frontier of two goods, X and Y, using a fixed amount of capital K and labor L. It shows how isoquants for goods X and Y can be combined on a two-dimensional graph with capital on one axis and labor on the other. This allows for the visualization of the efficient and inefficient allocation of resources between the two goods. The contract curve then represents all efficient combinations of producing X and Y given the available resources.

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241 views12 pages

Edgeworth Box

The document describes an Edgeworth Box, which graphically represents the production possibilities frontier of two goods, X and Y, using a fixed amount of capital K and labor L. It shows how isoquants for goods X and Y can be combined on a two-dimensional graph with capital on one axis and labor on the other. This allows for the visualization of the efficient and inefficient allocation of resources between the two goods. The contract curve then represents all efficient combinations of producing X and Y given the available resources.

Uploaded by

cahyo_icb
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 1

Edgeworth Box Suppose we look at the production possibilities for good X Then this may represent an isoquant for good X (e.g. CapitalX combinations of capital and labour producing 1 X) KX Similarly, this may be another isoquant for good X (e.g. producing 1.5 X)

X=1.5 X=1 0 LaborX LX

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 2

Edgeworth Box

We might, however, also use our capital and labour to produce Something else, say good Y. Just as with good X we CapitalY KY can draw combinations of inputs, capitalY and labourY, to produce a certain level of good Y. For example, the isoquants Y=2 and Y=3 in this figure.

Y=3 Y=2 0 LabourY LY

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 3

Edgeworth Box Combining these two possibilities the figure on the left represents isoquants for good X and the figure on the right isoquants for good Y

KX

KY

LX

LY

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 4

Edgeworth Box We can combine the information of these two figures into one figure

KX

KY

LX

LY

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 5

Edgeworth Box We can combine the information of these two figures into one figure

KX

LX

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 6

Edgeworth Box We can combine the information of these two figures into one figure

KX

LX

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 7

Edgeworth Box We can combine the information of these two figures into one figure

KX

LX

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 8

Edgeworth Box We can combine the information of these two figures into one figure 0 LX KY LY KX 0

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 9

Edgeworth Box Kx Ly The origin of good X is in the southwest corner Oy The origin of good Y is in the northeast corner

A Ly and Ky are measured relative to the Oy corner

Lx and Kx are measured relative to the Ox corner Ox

Ky Lx

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 10

Edgeworth Box

Kx K

Ly

Oy
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 Lx

Ox

This follows from the upper contour set of good Y at point A

Ky L

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 11

Edgeworth Box Kx K Moving K from X to Y and L from Y to X Can increase Ly Oy the production of X without lowering the prod. of Y The A combination of all efficient input allocations is called the

contract curve
Ky Ox

Lx

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 12

Edgeworth Box 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). Otherwise, the ppf is a strictly concave function, that is take 2 Y 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 convex, that is all points in between 2 arbitrary points that can be produced can also be produced
B X

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