The Edgeworth Box and equilibrium trade between two traders

¶ … Edgeworth Box.

Key = The names 'Octavio' and 'Abby' refer to Trader (a) and Trader (b). Each of their commodities (their Origin, or initial endowments) are on reverse sides of the diagram. If person a moves to the right, it means that he has more of commodity x than person b and that b has less commodity of that particular resource than has person a. Moving upwards, indicates that either a or b has more of commodity y than has the other individual. Moving in the northeast direction makes person a better-off than individual b, whilst moving in the southwest direction indicates that b is better-off than a. An example of a connecting point (or Pareto set) is seen in the bottom right hand corner, which indicates that combination of resources will eventuate into maximum good for both of them.

Help for drumming up new business via the Edgeworth Box can be inferred from Econ 301 (http://people.stfx.ca/tleo/MicroIILecture1.pdf) (pp. 4-5), which shows that an Equilibrium (where one Trader wishes to trade with the other (i.e., person a with person b) can consequent through a bargaining process when both individuals (or groups etc.) arrange their prices at mutual satisfaction of the other. Demand has to equate with the supply, and the supply has to be exactly what each trader wishes. In equilibrium, the budget line has to pass through the endowment point, and has to take the Origin into equation.