Producer Surplus

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    Producer surplus is a measure of the benefit or welfare that producers derive from selling output. Producer surplus is the difference between what producers are willing (and able) to supply at and what they actually receive. Producer surplus is the area between the market price and the supply curve.

    The supply curve shows the minimum price producers are willing and able to accept to sell different quantities of a good. Producers are willing to sell at a low price for the first unit but a higher price for each extra unit they sell. Although, producers receive the market price P* for each unit.

    At the market price P* producers sell Q* units of output and producer surplus is the blue area.

    An increase (decrease) in supply increases (decreases) producer surplus.

    Producer surplus is originally the blue and purple areas. After supply increases, the supply curve shifts rightwards from S to S’, equilibrium price falls from P* to P’ and output rises from Q* to Q’. The new producer surplus is the purple and green areas. Producer surplus falls a bit because a lower market price is received but producer surplus rises a lot because more is sold. Overall, producer surplus increases because the gain in producer surplus (the green area) is greater than the loss in producer surplus (the blue area).

    An increase (decrease) in demand increases (decreases) producer surplus

    Producer surplus is originally the blue area. After demand increases, the demand curve shifts rightwards from D to D’, equilibrium price rises from P* to P’ and output rises from Q* to Q’. The new producer surplus is the purple and blue areas. Producer surplus rises a lot because a higher market price is received and more is sold.

    Consumer and producer surplus could be analyzed separately (as shown above) or together (as shown below). For simplicity, only the effects of an increase in demand is illustrated here.
    An increase (decrease) in demand increases (decreases) both consumer and producer surplus.

    Consumer surplus is originally the yellow area. Producer surplus is originally the blue area. After demand increases, the demand curve shifts rightwards from D to D’, equilibrium price rises from P* to P’ and output rises from Q* to Q’. The new consumer surplus is the red area. The new producer surplus is the purple, yellow and blue areas. Consumer surplus falls a bit because a higher market price is paid but consumer surplus rises a lot because more is consumed. Producer surplus rises a lot because a higher market price is received and more is sold. The yellow area of lost consumer surplus is transferred to producers.

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