Financial Concepts for Loans and Real Estates

A Dead Wight Loss is a permanent loss of well being of the society. It occurs when equilibrium for a commodity is not Pareto Optimal. Pareto Efficiency is a broad concept with a broad application in economics. A change that can make at least one individual better off without making any other individual worst off is Pareto Efficiency. A situation is Pareto Optimum when no further improvement is needed. Many natural wastes in a system for e.g., leakage in water pipe are equal to Dead Weight Loss. Monopoly leads to lack of economic competition; it also creates Dead Weight Loss. In loss of benefits due to indirect tax there is some amount of Dead Weight Loss or excess burden which the society has to bear. In case of relatively elastic commodities the Dead weight Loss is more than the revenue earned by the government though the indirect tax. This is the reason why inelastic commodities are taxed more than elastic commodities.

Producer’s Surplus

Producer’s Surplus exists when actual price exceeds the minimum price that the seller is ready to accept. Let us take an example. If Sam considers as CD worth Rs. 50 and Ram, who owns it values the CD for Rs. 10 then, if Ram sells the CD for Rs. 30, Sam, who willing to pay Rs. 50 maximum for the CD actually got it for Rs. 30. Sam is now enjoying a consumer surplus of Rs. 20 and Ram who was ready to accept the minimum price of Rs 10 for the CD, sold it for Rs. 30 and enjoys the producer’s surplus of Rs. 20.

Producer’s surplus may appear to be a profit, but it takes different forms. To understand how Produer’s surplus takes different forms. Let us see one example.

Suppose the price of wheat is Rs. 35 per kg for many years, but now it has increased to Rs. 45 per kg. This increase in price of wheat draws more land under wheat cultivation. Now, farmers, who are cultivating and selling wheat, are enjoying Producer’s surplus of Rs. 10 which they are having due to increase in the price.

About the competition of market a good example came in light in 1984. It was Upjoh’s patent on ibuprofen-a painkiller that the company still markets under the brand name Motrin-expired. It got the good popularity soon. The most people who use ibuprofen, like most people who use aspirin, now purchase a generic version made by one of many producers.

The shift to perfect competition, not coincidentally, is accompanied by a sharp fall in the market price. When its patent expired, Upjohn immediately cut the price of Motrin by 35 percent, but as more companies started selling the generic drug, the price of ibuprofen eventually fell by another two-thirds.

Ten years later the patent on the painkiller naproxen-sold under the brand name Naprosyn-expired. The generic version of naproxen was soon selling at only one-tenth of the original of naprosyn.

It was Paul Krugman and Robin Wells who wrote about this competition in Perfect Competition of Micro Economics.

On the other hand, there is monopoly. It happens when one seller constitutes the whole industry, market comes under the monopoly. Monopoly exists when there is a single seller or producer.

There are some features and example of Monopoly –

Single seller or producer:

Mono is known as one. Poly is used for one seller.

No close substitutes

Barrier for entry of firm

Demand curve monopoly shows, a monopoly seller are the sole producer in the industry; it has total control over the price and production. So, the demand curve will be downwards slopping. It can increase the price if it is ready to sacrifice the demand a title and can decrease the price if it wants the sales to increase.

Competition ends under monopoly. It is the highest position of competition where all firms convert into single firm. Under the monopoly of market buyers are depended on sellers. There is no meaning of demand under monopoly.