Ch 72 Describe why the perfectly competitive market structur

Ch 7-2. Describe why the perfectly competitive market structure is used as a reference market structure in comparison to the imperfect competitive industries (i.e. monopoly, monopolistically competitive, and oligopoly)? (2 points)

Solution

The perfectly competitive market structure is used as a reference market structure because there is no deadweight loss in the perfect competition since price is charged equal to maginal cost. On the other hand, in other markets like monopoly etc, price is charged above marginal cost and as a result, some buyers who were willing to buy the good at price equal to marginal cost but could not buy due to higher price. As a result, there is a deadweight loss in these markets.