Principles of Microeconomics / Unit 2 MIC 0134 worked example, 60 to 90 seconds
Deadweight Loss from a Ceiling
The idea
To find the deadweight loss from a binding ceiling, first read the quantity supplied at the ceiling price; that is what gets traded, because sellers decide how much to offer. Second, find the price buyers would have paid for that last unit, reading up to the demand curve. Third, the deadweight loss is the triangle between the demand curve and the supply curve from the restricted quantity out to the equilibrium quantity: one half of the lost quantity times the vertical gap between the two curves at the restricted quantity.
In practice
Worked example: a market for a medicine clears at sixty dollars and twenty thousand doses. A ceiling of forty dollars cuts the quantity supplied to fifteen thousand, and at fifteen thousand doses buyers would have paid eighty. The vertical gap at the restricted quantity is eighty minus forty, or forty dollars; the lost quantity is five thousand. Deadweight loss is one half times five thousand times forty, which is one hundred thousand dollars.
Where people slip
Use the quantity supplied, not the quantity demanded. Buyers want more than fifteen thousand at forty dollars, but wanting does not create doses. The second slip is to measure the gap at the equilibrium, where it is zero; the triangle's height is at the restricted quantity, its widest point.
Your place on the trail
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