Blue contract curve showing tangential intersections of indifference curves on an Edgeworth box

The contract curve represents the locus of Pareto efficient allocations or points from which no further mutually beneficial trading is possible between two agents in a two good pure exchange economy. Two agents in a two good pure exchange economy will continue to trade from their initial endowments as long as there is a gain to be made and the result of such trades will eventually end up at some point on the contract curve because once you reach the curve there is no further trade that can make both agents better off. In other words it is the set of Pareto efficient allocations in an economy lying between the agents' initial endowments.

Any Walrasian equilibrium lies in the contract curve of the Pareto set. In the case of two goods and two individuals it can be represented in an Edgeworth box. On the contract curve the marginal rate of substitution is the same for all agents. Contents 1 Example 2 Simple Mathematical Analysis 3 See Also 4 References Example

Assume the existence of an economy with two agents Octavio and Abby who consume two goods X and Y of which there are fixed (i.e. finite) supplies. Further assume an initial distribution (endowment) of the goods between Octavio and Abby and let each have normally structured (convex) preferences represented by indifference curves. Octavio and Abby make mutually beneficial trades so long as each ones marginal rate of substitution differs. At the point where Octavioss marginal rate of substitution equals Abbys marginal rate of substitution no more mutually beneficial exchange is possible. This point is called the Pareto Efficient equilibrium. In the Edgeworth Box it is the point at which Octavios indifference curve is tangent to Abbys indifference curve. Theoretically Pareto Efficient equilibria can appear anywhere in the Edgeworth Box depending upon the location of the initial endowment and the structure of each agents preferences. The contract curve represents a locus of Pareto Efficient equilibria from southwest to northeast in the Edgeworth Box. Simple Mathematical Analysis

In the case of two goods and two individuals the contract curve can be found by:

subject to:

for different values of See Also Welfare economics List of economics topics. References Mas-Colell Andreu; Whinston Michael D.; & Green Jerry (1995). Microeconomic Theory. New York: Oxford University Press. ISBN 0-19-510268-1 This economics or finance-related article is a stub. You can help Wikipedia by expanding it.v d e