Producer Surplus
What is Producer Surplus?
Producer surplus is the difference between the minimum price a producer is willing to accept and the actual price they receive.
It measures the net benefit producers receive from selling a good or service. On a supply curve, it is the area above the supply curve and below the price received, up to the quantity sold.
Producer Surplus: a worked example
Suppose market supply is P = 2 + 0.5Q and the price settles at $8, so sellers bring 12 units to market. The lowest price that would draw out the very first unit is $2, the vertical intercept of the supply curve, so producer surplus is the triangle ½ × 12 × ($8 − $2) = $36. A seller whose cost on one unit is $5 but who receives $8 keeps $3 of that $36.
The mistake students make with producer surplus
Students treat producer surplus and profit as the same number. Producer surplus is total revenue minus total variable cost, the area above the supply curve and below the price, so it never subtracts fixed costs; economic profit equals producer surplus minus fixed costs, and the two are equal only when a firm has no fixed costs, which is the case in the long run when every input can be varied.
Producer Surplus questions
How do you calculate producer surplus on a graph?
Producer surplus is the area above the supply curve and below the market price, up to the quantity sold, which for a straight-line supply curve equals ½ × quantity × (price received minus the supply curve's vertical intercept). With supply P = 2 + 0.5Q and a price of $8, quantity is 12 and producer surplus is ½ × 12 × $6 = $36.
Is producer surplus the same as profit?
Producer surplus is not the same as profit: producer surplus is revenue minus variable cost, while economic profit is revenue minus total cost, so producer surplus exceeds economic profit by exactly the amount of fixed costs. The two coincide only when a firm has no fixed costs.
What happens to producer surplus when the market price falls?
A fall in the market price reduces producer surplus, because sellers earn less on every unit they still sell and the highest-cost units stop being produced at all. The loss is larger when supply is more inelastic, since those sellers keep producing almost the same quantity and simply absorb the lower price.
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Related terms
Common comparisons
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