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- Producer Surplus Producer surplus is a measure of producer welfare It is measured as the difference between what producers are willing and able to supply a good for and the price they actually receive The level of producer surplus is shown by the area above the supply curve and below the market price and is illustrated in the diagram below Pm is the minimum price that this producer requires to supply the product to the market As the price rises, there is a great incentive to supply – production will expand as a business moves up their supply curve Assuming the market has reached an equilibrium at quantity Q1 and price P1, and then the level of producer surplus is shown by the shaded/labelled area. Total revenue = price per unit x quantity sold = P1 x Q1 Price Supply Equilibrium Point P1 Producer Surplus Demand Pm Q1 Quantity Producer surplus and changes in demand and supply We first consider the effects of a change in market supply – for example caused by an improvement in production technology or a fall in the cost of raw materials and components used in the production of a good or service © Tutor2u Limited 2014 http://www.tutor2u.net/blog/index.php/economics/ - An outward shift of supply causes a fall in market price and a rise in equilibrium quantity The result is an increase in the total level of producer surplus Price Supply (1) Supply (2) Producer surplus at price P1 = area P1CA C P1 D P2 Producer surplus at price P2 = area P2DB PS1 A Demand B Q1 Q2 Quantity We now consider the effects on producer surplus of a rise in market demand An outward shift in demand causes a rise in both equilibrium price and quantity The result is an increase in the total level of producer surplus Price Supply Producer surplus at price P1 = area P1BA C P2 B P1 Producer surplus at price P2 = area P2CA PS1 Demand (2) Demand (1) A Q1 © Tutor2u Limited 2014 Q2 http://www.tutor2u.net/blog/index.php/economics/ Quantity