General Equilibrium & the Edgeworth Box
All markets clearing at once: the contract curve, Walras' law, and gains from exchange.
Definition
Analysis of all markets clearing simultaneously. In the two-person Edgeworth box, every efficient allocation lies on the contract curve where indifference curves are tangent.
Key equation
Exchange efficiency: MRS(A) = MRS(B); Walras' Law: if n−1 markets clear, the nth does too
The intuition
Partial equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. asks what happens in one market holding others fixed; general equilibrium admits everything feeds back, the wage affects the price of bread affects labor supply. The First Welfare Theorem is the payoff: competitive prices land the economy on the contract curve.
Exam tip
In Edgeworth-box questions, always check tangency of the TWO agents' indifference curves, prices are the line through the endowment supporting it.
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