Download Producer Surplus

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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
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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
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Pm is the minimum price that this producer requires to supply the product to the market
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As the price rises, there is a great incentive to supply – production will expand as a business moves
up their supply curve
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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.
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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
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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
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Q2
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Quantity