Up to this point, we have analyzed markets one at a time (partial equilibrium). But in reality, markets are interconnected. A change in the oil market affects transportation, which affects retail, which affects employment. General equilibrium analysis considers all markets simultaneously.
The Edgeworth box is the key visualization tool. It represents an economy with two consumers and two goods in a single diagram. Every point in the box is a possible allocation. The contract curve connects all the points where no reallocation can make one person better off without making the other worse off — these are the Pareto efficient allocations.
The First Welfare Theorem is one of the most important results in economics: under certain conditions (perfect competition, no externalities, complete information), a competitive equilibrium is Pareto efficient. The invisible hand actually works — free markets, left alone, produce efficient outcomes.
The Second Welfare Theorem is equally powerful: any Pareto efficient allocation can be achieved as a competitive equilibrium, given the right initial distribution of resources. This separates the questions of efficiency and equity. Markets can achieve any efficient outcome; society just needs to choose the right starting point through redistribution.
These theorems are not just academic. They define the conditions under which markets work well and, by implication, the conditions under which they fail. When externalities, monopoly power, or asymmetric information are present, the theorems break down — providing the economic justification for government intervention.
Interactive Edgeworth box diagrams let you move allocations, find the contract curve, and see efficiency and equity trade-offs visually.