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The General Equilibrium Theorem-part 2:

Constructing the three conditions for economic efficiency in a 2x2x2 economy model In this clip we put two consumers together, through the process of trade. We use the Edgeworth box in dealing with these two consumers. We show that trade helps these consumers (say, James and Karen) to reach an improved state of satisfaction, having engaged in trade. We show that trade improves efficiency in this consumption (i.e. exchange) sector, e.g. a movement from A to B or A to D. Trade helps the economy reach pareto efficiency, where none of the consumers could be further improved, without making one of the consumers worse off. The improvement happens after the consumers reach the Contract Curve, having traded (e.g. by bargaining). Any additional movement after this trade would not be pareto efficiency improving. It would hurt at least one of the consumers, e.g. a movement from point E to D (would hurt Karen) or from B to E (would hurt James).
Length: 10:02


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