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Deadweight Loss Calculator

Enter the original and new price along with quantity in the deadweight loss calculator and the tool will calculate the financial dead weight

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The deadweight loss calculator assists in evaluating the price ceiling and price floor in the marketplace. The price ceiling and price floor are essential to control the economy to avoid capitalization or monopoly.

What Is Deadweight Loss?

The deadweight loss is a market imbalance or inefficiency of the supply and demand. In economics, the deadweight loss occurs due to the irrelevant allocation of resources. It is the result of out-of-control demand and supply covariance. The deadweight loss calculator identifies the irrational relationship between supply and demand which makes the understanding of this financial term more clear.

Why Find Deadweight Loss?

You need to calculate deadweight loss to know the exact price ceiling and the price floor.  Let us discuss why!

Price Ceiling:

The price ceiling is the mandated maximum profit a seller is allowed to charge for a product or service. The cross-price ceiling calculator indicates what is the price ceiling of the consumer products. This is applied to stabilize the unnecessary price increase of energy and food items, so these items do not become unaffordable to consumers.

Application:

  • Price controls 
  • Rent controls

Price Floor:

The price floor is applied to enforce the minimum wage rate and living wage laws. The price floor is the minimum legal rate for hiring services, labor, or financial capital. The deadweight loss calculator provides us with the estimation of the minimum wage rate and labor charges.

Application:

  • Minimum wage
  • Basic standard of living

Major Causes of Deadweight Loss:

The major causes of the deadweight loss are:
  • Over Taxation 
  • Irrational Duties on Import and Export

How to Calculate Deadweight Loss?

The dead weight loss formula is: DWL = ½[(Pc - Pp)(Qe - Qt)] Where: DWL =  Deadweight Loss  Pp = Original Price  Pc = New Price  Qe = Original Quantity  Qt = New Quantity  The deadweight loss calculator

Practical Example:

Let's suppose the original price of the 3 items of product “A” is $ 20 and the new price is $ 50. Then what is the deadweight loss burden on consumers?

Given:

Original Price = $ 20 New Price = $ 50 Original Quantity = 3 items New Quantity = 2 items DWL =?

Solution:

The deadweight loss equation is: DWL =½[(Pc - Pp)(Qe - Qt)] DWL = ½[(50- 20)(3 - 2)] DWL = ½[30] DWL =  $ 15

How to Calculate Deadweight Loss From a Graph?

To calculate the deadweight loss on graph follow the steps below:

Step 1: 

First, you need to determine the Price (P1) and Quantity (Q1) to find the deadweight loss on graph.

Step 2: 

The second step derives the value of deadweight loss on graph by applying the formula in which 0.5 is multiplied by a difference 

Step 3:

Now spot where is deadweight loss on a graph and it is between the new price and old price (P2-P1), new quantity, and old quantity (Q1-Q2) in the deadweight loss graph. Deadweight Loss Calculator Graph

Working of the Deadweight Loss Calculator:

To calculate deadweight loss with the dead weight calculator, you need the following input values: Let’s find out how! Input:
  • Enter the original and new price 
  • Enter the original and new quantity
  • Tap calculate
Output:
  • Deadweight loss 
  • Step-by-step calculation 

FAQs:

Can Deadweight Loss be Negative?

It cannot be a negative value. But, it can be zero. This occurs when the demand is perfectly elastic or when the supply is perfectly inelastic.

What is Inelastic and Elastic Demand?

  • It means demand is not affected by the various factors. In such economies, the deadweight loss never happens.
  • An elastic demand is one in which the change in quantity demanded due to a change in price is significant. 

References:

From the source of Investopedia.com: Deadweight loss From the source of Wallstreetmojo.com: DWL, Monopoly
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