• Contract Curve is the set of pareto efficient points in the edgeworth box.
    • Example. The black curve in (b) is the contract curve.
    • The gradient of the two curves must be equal in every point of the contract curve.
    • The Core is the set of Pareto efficient allocations that make both parties better off than their endowments. (The highlighted section inside the green is the core.)
  • Equilibrium is when the exchange rate of goods (i.e. the price ratio) is set in such a way that trade occurs and there is market clearance (i.e. ).
    • It must be pareto efficient.
    • Example of a Disequilibirum. Here. price is set to . Blue player will move , and red . But those two points do not meet.
    • Example of Equilibirum. Here, price is set to . Blue moves , and Pink moves and therefore demand for bananas is equal to supply of bananas, and demand for oranges are equal to supply of oranges.
    • Solving for the equilibirum:
      1. Get the Ordinary Demand for good from both parties.
      2. Set the equilibirum condition
      3. Solving this for the price ratio will yield the relative price (=price that will lead to a trade that results in an equilibirum).