Producer Surplus

1
Producer Surplus

• When producers sell products in the market they
  may receive more than the amount they needed to
  receive to supply a unit they receive producer
  surplus.

2
producer surplus
Recall that the supply curve shows various prices
and associated quantities producers would make
available for sale. The amount sellers need to
receive to induce them to make available for sale
units of a product are located on the supply
curve. The amount actually received is market
determined. NOTE as we try to learn about this
concept is it useful to pick a quantity and look
up vertically to the supply curve and see the
price.
3
need to receive
Notice at Q 1 P1 is the lowest price at which
the firm would supply Q 1. P1 is not enough of
an amount to have the 2nd unit supplied. To get
2 units supplied, P2 is required.
P
S
P2 P1
a b c d e
Q
1 2
4
need to receive
On the previous slide we see that to get 1 unit
supplied P1 was need. P1 times 1 P1 and is the
area of the rectangle made up of C and D. This
is the amount needed to supply the first unit.
If we ignore area c we could say the area under
the supply up to 1 unit is the amount needed to
get that unit supplied. You see the area under
the curve is an under-estimate of the amount
needed but it makes life easy in terms of a
visual look. Similarly area b e P2, the
amount needed to have the second unit supplied.
If you ignore b we have just the area under the
curve. The area under the supply curve out to a
quantity is the amount needed to supply those
units in the market.
5
P
Here I picked This Q at random and I show you
that triangle B represents the minimum payment
needed to get the sellers to supply the This Q.
S
B
Q
This Q
6
P
If the market price is This P, This Q would be
supplied by firms. The actual amount received by
firms would be rectangle A B and we would call
this the total revenue of the firms involved. It
is also called industry sales.
S
This P
A
B
Q
This Q
7
P
Producer surplus here is area A. A is that part
of revenue that is over and above the minimum
payments (area B) needed to supply This Q.
S
This P
A
B
Q
This Q
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Producer surplus
P 25 10
With S D we get P 10 and Q 300
Area A .5(300)(10 - 4) 900 Area A B
10(300) 3000 Area B A B A
2100
A B
4
300 Q
Producers actually receive A B 3000, but only
needed B 2100, so the producer surplus is A
900.
9
producer surplus
What do producers do with the surplus
received? They may use it to pay off some
expenses or it could be a part of profit. Note
producer surplus and profit are not the same
thing.