General equilibrium analysis

Partial equilibrium studies one market in isolation, but markets are linked: a change in the wage moves food prices, which moves labour supply, and so on. General equilibrium studies all markets together and asks when every market clears at once. In the simplest exchange economy, the Edgeworth box shows all possible divisions of two goods between two people, and the contract curve joins the divisions where neither person can be made better off without harming the other. Worked example: if person A's marginal rate of substitution is 2 and person B's is 3, they are not at an efficient division — A values X less relative to Y than B does, so trade (A giving X for Y) can improve one without harming the other.