It is essential to review our understanding of the workings of the
competitive process. We thus list the conditions required for economic efficiency in exchange, in input markets, and in output markets.
1. Efficiency in exchange: All allocations must lie on the exchange contract curve so that every consumer’s marginal rate of substitution of food for clothing is the same:
A competitive market achieves this efficient outcome because, for consumers, the tangency of the budget line and the highest attainable indifference curve assure that: