Lesson preview · Edgeworth Box
The Contract Curve
~6 min · Free to read
Inside the box there are infinitely many tangency points — not just one. The set of all tangencies forms a curve that runs from John’s origin to Lisa’s origin. This is the contract curve: every Pareto efficient allocation lives on it. Off the curve, the indifference curves cross and a Pareto improvement exists. On the curve, and no improvement is possible.
Key Term
Contract Curve and the Core
Contract curve: the locus of all Pareto efficient allocations — every tangency of John’s and Lisa’s indifference curves.
Core: the slice of the contract curve where both consumers are at least as well off as at the starting endowment. Voluntary trade can only land in the core, because no one will agree to a trade that makes them worse off.
All efficient allocations equalise the two consumers’ marginal rates of substitution, subject to the resource constraints
The shape of the contract curve depends on preferences. When both consumers have identical preferences over the two goods, it is the diagonal of the box. When their preferences differ — say John cares more about coconuts and Lisa cares more about bananas — the curve bends away from the diagonal toward each origin.
Worked Example
John has utility (he cares more about bananas). Lisa has (she cares more about coconuts). Total: 1 unit of each good (normalised). Find the contract curve.
Check yourself · no marks
Why does the core shrink as the economy is replicated with more identical consumers?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 5
The contract curve is the set of allocations where:
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