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The Edgeworth Box is a diagram illustrating the distribution of two goods between two consumers, helping us visualize all possible allocations of goods and identify points where consumers can be better off through trade.
It’s commonly useful in information theory and economics, or any calculation and field involving utility, good consumption, and good exchange.
Visually, the Edgeworth box is basically two graphs, one for each consumer, one of which is flipped and stacked on top of the other.
More specifically:
The origin point for consumer A is in the bottom-left, while the origin point for consumer B is the top right. The width represents the total quantity available of Good X, while the height represents the total quantity available of Good Y.
That’s the most basic form of the box. Our next addition, and the most critical component of the Edgeworth box, is that of indifference curves.
Indifference curves, as you’ve likely learned, are combinations of goods that give consumers the same level of utility. There are theoretically infinite indifference curves, which we’ll detail shortly, but for now let’s add some to our graph:
Each combination of goods is an allocation. The initial endowment is the starting allocation before any trade occurs, thus detailing each consumer’s initial quantities of goods.
Pareto efficiency, meanwhile, is an allocation where no individual can be made better off without making someone else worse off. The Pareto set is a line connecting all Pareto efficient points, which are the points where indifference curves meet. This functionally represents the infinite indifference curves. Adding that element to our graph:
