If you recalled from chapter 4, we discovered a concept called Deadweight Loss. Sounds familiar right? So, what exactly is Deadweight Loss? A lot of us would give the following answers:
Well, all the answers are correct, except the last one because after this post, you will be sure to be in the know! We just gotta combine the first 3 answers together and use a little bit of graphical and mathematical illustration to prove our understanding of this rather profound yet simple concept!
Remember that a Perfect Competition market structure is always efficient as there is no Deadweight Loss, or no loss in consumer utility. However, when a monopolist comes into play, we notice that stupid area of Deadweight loss! It is because the monopolist are charging a price above the Perfect Competition Equilibrium Price which creates that area of Deadweight loss.
So how do we illustrate or calculate that area? We simple gotta compare a perfect structure and an imperfect structure! We will only require 2 types of graphs for this and a short paragraph of mathematical equations.
With this knowledge, you will be able to answer questions with a lot of depth which involves having you to explain Deadweight Loss or Allocative Efficiency! This material was taught to me directly from Amos Witztum himself so I’m sure he would love to see this material appearing in the exams! But be sure to explain it fast! Although it MIGHT be worth just a few marks, it will set you apart from the rest of the exam candidates and it will definitely change the marker’s impression on your answer scripts!
This is also an extremely useful concept if you taking further economic units!