In a competitive market the prices of the two goods determine the terms of exchange among consumers. If A is the initial allocation of goods and the price line PP' represents the ratio of prices,the competitive market will lead to an equilibrium at C,the point of tangency of both indifference curves. As a result,the competitive equilibrium is efficient.In a competitive market the prices of the two goods determine the terms of exchange among consumers. If A is the initial allocation of goods and the price line PP' represents the ratio of prices, the competitive market will lead to an equilibrium at C, the point of tangency of both indifference curves. As a result, the competitive equilibrium is efficient