Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

H
D
F
3
B
E
3
A
C
1
A
2
B
2
A
1
B
0
A
0
B
X
Y

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For example, if individual A exchanged 1Y for 5X with 
individual B, individual A would move from point C on A
1
to point F 
on A
3
, while individual B would move from point C to point F along 
B
1
. Then, A would obtain all of the benefits from exchange while B 
would neither gain nor lose. At point F, MRS
XY
for A equals MRS
XY
for B and there is no further basis for exchange. Finally, if A 
exchange 3Y for 3X with B and gets to point E, both individuals 
gain from exchange since point E is on A
2
and B
2
. Thus, starting 
from point C, which is not on line DEF, both individuals can gain 
through exchange by getting to a point on line DEF between D and 
F. The greater A‘s bargaining strength, the closer the final 
equilibrium point of exchange will be to point F, and the greater will 
be the proportion of the total gains from the exchange going to 
individual A (so that less will be left over for individual B). 
Curve 0
A
DEF0
B 
is the contract curve for exchange. It is the 
locus of tangency points of the indifference curves of the two 
individuals. That is, along the contract curve for exchange, the 
marginal rate of substitution of commodity X for commodity Y is the 
same for individuals A and B, and the economy is in general 
equilibrium of exchange. Thus, for equilibrium, 
……………….. (5.1)
Starting from any point not on the contract curve, both individuals 
can gain from exchange by getting to a point on the contract curve. 
Once on the contract curve, one of the two individuals cannot be 
made better off without making the other worse off. For example, a 
movement from point D (on A
1
and B
3
) to point E (on A
2
and B
2
) 
makes individual A better off but individual B worse off. Thus, the 
consumption contract curve is the locus of general equilibrium of 
exchange. For an economy composed of many consumers and 
many commodities, the general equilibrium of exchange occurs 
where the marginal rate of substitution between every pair of 
commodities is the same for all consumers consuming both 
commodities.