Contract Curve

The contract curve is the set of all potential agreements within an Edgeworth box. It consists of the points where the indifference curves of two consumers are tangent, indicating allocations that are Pareto efficient. At each point along the contract curve, both individuals have identical marginal rates of substitution. The following Edgeworth box diagram illustrates a typical contract curve:

The contract curve captures all equilibrium points within the Edgeworth box and all Pareto-optimal allocations. Any allocation that lies outside this curve is inefficient in the Pareto sense, as improving one consumer’s welfare would necessarily reduce the other’s. Only when an allocation falls off the contract curve do both parties have an incentive to trade, seeking mutual gains from exchange.