ECON 1011 Lecture Notes - Lecture 5: Pareto Efficiency, The Need, Perfect Information
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ECON 1011 Full Course Notes
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Both individuals" utility increases within the lends of two different indifference curves. Only trades in the lens in the diagram will be mutually voluntary. Pareto optimum they could no longer trade further to increase utility maximum utility achieved. If you take the pure exchange model too literally, the model will not be applicable to the real world. The names of the individuals and the names of the goods are inconsequential to the conclusion of the model. There are assumptions built into the model about ethics and morals. Greed is needed to assure gains for both people. When smith and jones trade oranges for apples, the total happiness is increasing that arises because entirely of the reorganization of the bundles of available goods. No use of violence or threats to take goods away from another individual. There is a limit to the maximum utility of an individual because they both have constraints of the ethical obligations unlike the real world.
