In this lesson on Deadweight Loss, you will learn the following concepts:
1. What is allocative efficiency?
2. What is meant by deadweight loss?
3. What happens when the price in the market is above the allocatively efficient
price?
4. What happens when the price in the market is below the allocatively efficient
price?
5. How do you figure the area of consumer deadweight loss?
6. How do you figure the area of producer deadweight loss?
7. How do you figure the area of total deadweight loss?
1. What is allocative efficiency?
2. What is meant by deadweight loss?
3. What happens when the price in the market is above the allocatively efficient
price?
4. What happens when the price in the market is below the allocatively efficient
price?
5. How do you figure the area of consumer deadweight loss?
6. How do you figure the area of producer deadweight loss?
7. How do you figure the area of total deadweight loss?
1. What is allocative efficiency?
3. What happens when the price in the market is ABOVE the allocatively
efficient price?
efficient price?
2. What is meant by deadweight loss?
5. How do you figure the area of consumer deadweight loss?
6. How do you figure the area of producer deadweight loss?
Allocative efficiency occurs at the point where the last unit provides a marginal
benefit to consumers equal to the marginal cost of the last unit produced by the
suppliers. Beyond that unit the marginal cost of producing the product is greater
than the marginal benefit received by that consumer.
On the graph and table below, take your cursor or finger and run it down the
numbers inside the yellow box table. When you are done with that, notice that
the demand curve (D) is equal to the price (P) and the marginal benefit (MB) of
the consumer and the supply curve (S) is equal to the marginal cost (MC) of the
producer.
benefit to consumers equal to the marginal cost of the last unit produced by the
suppliers. Beyond that unit the marginal cost of producing the product is greater
than the marginal benefit received by that consumer.
On the graph and table below, take your cursor or finger and run it down the
numbers inside the yellow box table. When you are done with that, notice that
the demand curve (D) is equal to the price (P) and the marginal benefit (MB) of
the consumer and the supply curve (S) is equal to the marginal cost (MC) of the
producer.
Take your cursor or finger and drag the price (P) to a HIGHER price than
the allocatively efficient price of $6 to see that a higher price creates
allocative INEFFICIENCY. Allocative EFFICIENCY takes place at the
yellow dot where P = MC.
the allocatively efficient price of $6 to see that a higher price creates
allocative INEFFICIENCY. Allocative EFFICIENCY takes place at the
yellow dot where P = MC.
Deadweight loss is the economic INEFFICIENCY that occurs when the price
is above or below the perfectly competitive market price. Another name for
deadweight loss creates allocative INEFFICIENCY.
Take your cursor or finger and drag the price (P) up and down, towards the
blue dot and red dot respectively, to see the total deadweight loss (shaded
in gray inside the graph).
is above or below the perfectly competitive market price. Another name for
deadweight loss creates allocative INEFFICIENCY.
Take your cursor or finger and drag the price (P) up and down, towards the
blue dot and red dot respectively, to see the total deadweight loss (shaded
in gray inside the graph).
Take your cursor or finger and drag the price upward.
Take your cursor or finger and drag the price upward.
4. What happens when the price in the market is BELOW the allocatively
efficient price?
efficient price?
Take your cursor or finger and drag the price to a lower price than the
allocatively efficient price to see what happens.
allocatively efficient price to see what happens.
5A. How do you figure the area of consumer deadweight loss?
Take your cursor or finger and drag the price downward.
6A. How do you figure the area of producer deadweight loss?
Take your cursor or finger and drag the price downward.
In this unit on Deadweight Loss, you have learned about each of the following:
1. What is allocative efficiency?
2. What is meant by deadweight loss?
3. What happens when the price in the market is above the allocatively efficient
price?
4. What happens when the price in the market is below the allocatively efficient
price?
5. How do you figure the area of consumer deadweight loss?
6. How do you figure the area of producer deadweight loss?
7. How do you figure the area of total deadweight loss?
1. What is allocative efficiency?
2. What is meant by deadweight loss?
3. What happens when the price in the market is above the allocatively efficient
price?
4. What happens when the price in the market is below the allocatively efficient
price?
5. How do you figure the area of consumer deadweight loss?
6. How do you figure the area of producer deadweight loss?
7. How do you figure the area of total deadweight loss?
Deadweight Loss (DWL) (3:06 minutes)
Reffonomics.com 3 x 3 Videos (3-minute videos + 3 Multiple Choice
Questions)
Questions)
| Deadweight Loss |
| Steven M. Reff Economics Lecturer University of Arizona (2007 - 2016) The 2015 University of Arizona Five-Star Faculty Award |
Notice on the graph above that Allocative Efficiency takes place at a price
of $10 and quantity of 10. Allocative Efficiency is when P = MC. This means
the price the consumer pays is equal to the marginal cost of the next unit
produced. The consumer used his or her resources to obtain the $10 to
purchase the product which is equal to the additional cost of resources
for the business to supply that next unit at $10 (going from the 9th unit to the
10th unit).
of $10 and quantity of 10. Allocative Efficiency is when P = MC. This means
the price the consumer pays is equal to the marginal cost of the next unit
produced. The consumer used his or her resources to obtain the $10 to
purchase the product which is equal to the additional cost of resources
for the business to supply that next unit at $10 (going from the 9th unit to the
10th unit).
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Using the graph below take your cursor or finger and drag the yellow dot to
the allocatively efficient point.
the allocatively efficient point.
Notice this is where the price paid by the consumer is equal to the marginal
cost of the last unit produced. So stated simply:
Allocative Efficiency is where P = MC.
cost of the last unit produced. So stated simply:
Allocative Efficiency is where P = MC.
Notice when the price (P) is above the allocatively efficient P of $6
and quantity of Q6, the quantity is less than the allocatively efficient
quantity (Q6). At the new lower quantity, the P > MC at that quantity (Q)
(look at the blue vertical dashed line). The quantity demanded, which is
also be the quantity sold (Q), will be less than the allocatively efficient
quantity (Q6).
and quantity of Q6, the quantity is less than the allocatively efficient
quantity (Q6). At the new lower quantity, the P > MC at that quantity (Q)
(look at the blue vertical dashed line). The quantity demanded, which is
also be the quantity sold (Q), will be less than the allocatively efficient
quantity (Q6).
Notice when the price (P) is dragged below the allocatively efficient price
of $6 and quantity of Q6, the quantity is less than the allocatively efficient
quantity (Q6). The quantity sold, which is also the quantity supplied
(indicated by the red vertical dashed line) will be less than the allocatively
efficient quantity (Q6).
of $6 and quantity of Q6, the quantity is less than the allocatively efficient
quantity (Q6). The quantity sold, which is also the quantity supplied
(indicated by the red vertical dashed line) will be less than the allocatively
efficient quantity (Q6).
Notice at a higher price, consumer deadweight loss occurs because those
consumers who were willing to pay the perfectly competitive market
equilibrium price of $6 are now left out of the market because they are
not willing to pay the higher price in the market.
The area of consumer deadweight loss is shown as the area of the
gray triangle.
consumers who were willing to pay the perfectly competitive market
equilibrium price of $6 are now left out of the market because they are
not willing to pay the higher price in the market.
The area of consumer deadweight loss is shown as the area of the
gray triangle.
Notice at a lower price, consumer deadweight loss occurs because those
producers who were willing to sell at the perfectly competitive market
equilibrium price of $6 are now left out of the market. At prices lower than
$6, the quantity supplied, which is also the quantity sold, decreases as
suppliers are willing to supply fewer products at lower prices.
The area of consumer deadweight loss is shown as the area of the
gray triangle.
producers who were willing to sell at the perfectly competitive market
equilibrium price of $6 are now left out of the market. At prices lower than
$6, the quantity supplied, which is also the quantity sold, decreases as
suppliers are willing to supply fewer products at lower prices.
The area of consumer deadweight loss is shown as the area of the
gray triangle.
Notice at a HIGHER price, fewer units are demanded; thus, fewer units
will be sold (Qs). With fewer units being sold, the quantity supplied
goes down along the supply curve.
will be sold (Qs). With fewer units being sold, the quantity supplied
goes down along the supply curve.
Notice that as fewer units are sold in the market, suppliers who were
willing to supply at the equilibrium price ($6) and equilibrium quantity
(6 units) are not willing to supply at the lower price and lower quantity.
willing to supply at the equilibrium price ($6) and equilibrium quantity
(6 units) are not willing to supply at the lower price and lower quantity.