How do you calculate deadweight loss on a graph?

To calculate deadweight loss on a graph, follow these steps:

1. Identify the Market Equilibrium: Find the point where the supply and demand curves intersect. This point shows the equilibrium price and quantity.
2. Determine the Price Ceiling or Tax: If there’s a price ceiling, tax, or any other market distortion, identify the new price and quantity. This will usually be below the equilibrium quantity.
3. Draw the New Supply and Demand Curves: If a tax is imposed, the supply curve shifts upward (or the demand curve shifts downward) to reflect the new price.
4. Locate the New Quantity: Find the new quantity sold in the market after the distortion.
5. Calculate the Deadweight Loss Area:
   • The deadweight loss is represented by a triangle on the graph.
   • The base of the triangle is the difference between the equilibrium quantity and the new quantity.
   • The height of the triangle is the difference between the prices consumers are willing to pay and the prices producers receive.
6. Use the Formula for Area of a Triangle:

This area represents the loss in total welfare due to the market distortion.