Question

Draw a graph with two demand curves – one that is fairly elastic (labeled D_e) and one that is fairly inelastic (labeled D_i). Draw a supply curve and label it S. Suppose this market sees an increase in the price of this good due to the imposition of a tax. Draw the new supply curve and label it S₂. Compare the impact in the market of the shift in supply between the elastic demand curve and the inelastic demand curve. Which demand curve would create more deadweight loss in the market when supply shifts? How can elasticity be used to explain the difference in the size of deadweight loss?

Answer 1

Deadweight loss refers to the inefficiency created by the market forces of demand and supply while creating the situation on non equilibrium. So here more of deadweight loss is created by the graph where demand was fairly elastic as here the supply has increased causing disequilibrium in the economy.
Size of the deadweight loss will be minimum in case of fairly inelastic demand because here there no change either in demand of in supply. On the other hand deadweight loss is more in case of fairly ealstic demand as here the supply has increased.

Price Onautita (mi This is the graph of fairly inelastic demand. Due to the increase in prices of the product, the supply will increase according to the law of supply.

Price (mits) pe De Філомнч (имя) This is the graph for fairly elastic demand curve. In this type of market situation, due to the increase in prices of the product, the quantity supplied of the same will increase according to law of supply from Q1 to Q2.