producer surplus

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• PRODUCERS SURPLUS AND EQUILIBRIUM

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CONCEPTS

• 1.Introduction to Producers Surplus
• 2.Producers Benefits
• 3.Producers Equilibrium
• (a)Maximizing output subject to a cost
  constraint
• (b)Minimizing cost subject to an output
  constraint

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PRODUCERS SURPLUS

• Market Supply depicts the various quantities that
  suppliers would be willing to sell at different
  prices.
• Supply curve can also be viewed as a measure of
  the marginal (opportunity) cost to the seller of
  supplying various quantities of the good.
• Assumption The marginal (opportunity) cost of
  production increases as market output expands.
• Producers marginal cost of production is the
  lowest price he/she would accept.

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PRODUCERS SURPLUS

• Producer Surplus is the amount a seller is paid
  minus the cost of production.
• Producer surplus measures the benefit to sellers
  of participating in a market.
• A producer might be willing to accept 3 (his/her
  MC of production) to supply the good but in fact
  gets 5 market price.
• In this case, producer gains a surplus of 2.

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PS (6 x 6) - (1 2 3 4 5 6) 15
P
S
6
5
4
3
2
1
Q
6
5
4
3
2
1
6
Total Producer Benefits (Revenue)
P
S
6
5
4
3
2
1
Q
6
5
4
3
2
1
7
Producer Surplus 15
P
S
6
5
4
Producer Costs
3
2
1
Q
6
5
4
3
2
1
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Producers equilibrium

• Producers try to maximize output with minimum
  costs.
• Producers equilibrium can be explained with the
  help of two curves
• 1.Iso-quant curve
• 2.Iso-cost curve

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Producers equilibrium

• Isoquant curve shows all possible combinations of
  two inputs labour and capital that will give the
  producer same output level. Output is fixed along
  a given isoquant.
• Isocost Line shows all possible combinations of
  Labour and Capital that can be purchased given PL
  and PK and limited producer budget (total cost
  outlay).

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Maximizing output subject to cost constraint

• Producer has to maximize his output with a given
  cost structure.
• In this situation,an isoquant map has to be
  combined with a single isocost line to identify
  the point of equilibrium.
• Higher isoquants indicate higher level of
  production.

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Diagram showing producer equilibrium.
D

K
E
Is3
k1
Is2
L
Is3
0
L1
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conditions

• Two conditions necessary for producer
  equilibrium
• 1.The iso-cost line is tangent to iso-quant
• 2.Iso-quant is convex to the origin at the point
  of equilibrium

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Minimizing cost subject to an output constraint

• Producer wants to produce the output with minimum
  cost.
• Hence, there will be a single isoquant.
• This will ensure his equilibrium.

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Conclusion

• We studied producers surplus, producers
  equilibrium in detail.