An expository device widely used in welfare economics to explain efficient resource allocation. This is often known as an Edgeworth- Bowley box, from its inventors. If an individual, firm, industry, or economy has two types of resources, and uses them for two different purposes, the box shows the amounts of resources available on its axes. Each point in the box represents a possible allocation of resources, measuring the amounts used for one purpose from one corner as the origin, and the amounts used for the other purpose from the opposite corner. indifference curve for the consumption of two goods, or isoquant for the use of two inputs, using the opposite corners as origins, can then be inscribed in the box. Points where the indifference curves or isoquants are tangential represent Pareto-optimal allocations of resources. Points where the indifference curves or isoquants cross are not Pareto-optimal. A line joining all points of tangency, called the contract curve, can be drawn across the box from one origin to the other. Moving along the contract curve more of one object of resource use is achieved, and less of the other.

The horizontal axis shows available supplies of factor X; the vertical axis shows available supplies of factor Y. Point O₁ at the SW corner of the box is the origin for good 1; point O₂ at the NE corner is the origin for good 2. Any point in the box shows an allocation of factors between the two industries: factors West and South of the point are used in good 1, factors East and North are used in good 2. i₁ and i₂ are isoquants for goods 1 and 2. Any point such as E where isoquants for the two goods are tangential to each other is a Pareto-optimal allocation. GEH is the common tangent to both isoquants; its slope shows relative factor prices. Any point such as F, where isoquants are not tangential, is not Pareto-optimal; the isoquant i′₂ is flatter than i₁, and output of one or both goods could be increased by moving towards E. O₁ EO₂ is the contract curve. A similar argument applies to allocating fixed quantities of two goods between two consumers. 0198607679.box-diagram.1.jpg FIGURE 2: Box Diagram

See also:

Pareto-optimality

• local government
• local maximum
• local minimum
• location
• lock-out
• locomotive principle
• logarithm
• logarithmic scale
• logistic curve
• log-linear function
• log-normal distribution
• log-rolling
• Lomé Convention
• London Inter Bank Offered Rate
• London International Financial Futures and Options Exchange
• long-dated security
• long position
• long rate
• long run
• long-run average cost
• long-run marginal cost
• long-run Phillips curve
• long-term interest rate
• long-term unemployment
• Lorenz curve