Edgeworth box
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In economics, an Edgeworth box, named after Francis Ysidro Edgeworth, is a way of representing various distributions of resources. Edgeworth's original two axis depiction was developed into the now familiar box diagram by Pareto in 1906 and was popularized in a later exposition by Bowley. The modern version of the diagram is commonly referred to as the Edgeworth-Bowley box.
Imagine two people (Octavio and Abby) with a fixed amount of resources between the two of them — say, 10 liters of water and 20 hamburgers. If Octavio takes 5 hamburgers and 4 liters of water, then Abby is left with 15 hamburgers and 6 liters of water. The Edgeworth box is a rectangular diagram with Octavio's Origin on one corner (represented by the O) and Abby's origin on the opposite corner([represented by the A). The width of the box is the total amount of one good, and the height is the total amount of the other good. Thus, every possible division of the goods between the two people can be represented as a point in the box.
In theory, it is possible to draw among these points, indifference curves for both Abby and Octavio representing combinations of the goods that are of equal value, respectively, to Octavio and Abby. For example, Abby might value 1 liter of water and 13 hamburgers the same as 5 liters of water and 4 hamburgers, or 3 liters and 10 hamburgers. There is, of course, an infinity of such curves (assuming water and hamburgers to be infinitely divisible) that could be drawn among the combinations of goods for either consumer (Octavio or Abby).
Wherever one of these curves for Abby happens to just touch (but not cross) a curve of Octavio's, a unique combination of the two goods is identified that yields both consumers a maximum value (which consumer realizes the greater value cannot be known, even to the consumers). Such tangential contacts between the infinity of indifference-curve pairs, if plotted, will form a trace connecting Octavio's origin (O) to Abby's (A).The curve connecting points O and A is often called the contract curve.
