General theory

Pareto efficiency

Assume we have 2 individuals and 2 goods and 1 individual has now all goods. So initially he is on a normal indifference curve without trade.

They all want to get on to the highest possible ind. curve. By trade they can get to higher indifference curve:

Originally at n1 (original endowement),

They trade to somewhere between. Point A on a smaller lens is more efficient, but don't maximise welfare.

Pareto optimality - it is impossibel to improve the welfare of one individual without damagin the welfare of the other.

Poiints of tangency between indifference curves is the contract curve.

-dy/dx=(

MRSy,x)1=(MRSy,x)2

Both indidualsuse their ibine )iniyial endowment.

When straight line utility, the only 1 is produced.

Fixed ratios of production(kinked ind.), then you don't care about the relative prices. In the long-run kink disappears.