ECON 100B Lecture Notes - Lecture 2: Substitute Good, Edgeworth Box, Contract Curve

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Notion of efficiency (no waste: economics is about scarcity and trade-offs, most economic decisions we face incur trade-offs, economics focuses our minds on trade-offs, e. g. 2 people: he created a graph with utility 1 (for person 1) and utility 2 (for person 2) as perfect substitutes. Everything under the graph is a feasible action while anything over the curve is infeasible. Obviously the preferred pairings for these people would be at the extremes given they are substitutes: on the ppf (production possibility frontier) , utility for one person is a maximum given other persons" utility. Person 1 must decrease. (the indifference curve he drew was concave, same with the graph previously stated): definition: an allocation is efficient if it is impossible to make one person better off without making someone else worse off. In other words, points within the concave curve are not efficient because they do no follow the definition mentioned above.

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