Course

Producer Surplus

Instructor: Alex Tabarrok, George Mason University

Producer Surplus : The producer’s gain from economic exchange. It is calculated by taking the difference between the market price and the minimum price at which a

Producer Surplus: The producer’s gain from economic exchange. It is calculated by taking the difference between the market price and the minimum price at which a producer is willing to sell. This is from the video “A Deeper Look at the Supply Curve” in the Principles of Microeconomics course.

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Transcript

Producer surplus is just the producer’s version of consumer surplus. Remember, consumer surplus is the consumer’s gain from exchange, so producer surplus is the producer’s gain from exchange. It's the difference between the market price and the minimum price at which producers would be willing to sell a given quantity. Total producer surplus is the sum of the producer surplus of each seller, and as I'll show you in a minute, what this means graphically is that total producer surplus is measured by the area above the supply curve and below the price.


Let's take a look. Producer surplus is the area above the supply curve and below the price. Here's our supply curve. Suppose that the price is $40 and the producer surplus at that price is this blue area right here. We can think of this as the producer surplus at the lowest cost to suppliers, plus the producer surplus at the second lowest, plus the producer surplus at the third lowest, the fourth lowest, and so forth, until we get to the marginal supplier and notice that the supplier on the margin earns no producer surplus at all. It is this supplier, their costs are just basically equal to the price, they're not earning any producer surplus. Again, as with consumer surplus, remember that we can and in fact, we will be calculating these areas using the formula for the area of a triangle.

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