producer surplus

Producer surplus is a measure of producer welfare. It is the difference between what producers are willing and able to supply a good for and the price they actually receive. The level of producer surplus is shown by the area above the supply curve and below the market price and is illustrated below.

The level of producer surplus is shown by the area above the supply curve and below the market price

Consider the diagram above. The minimum price that the firm requires to supply products to the market is 0A. As the market price rises, producer supply expands (we move up the supply curve)

At price P1 the level of producer surplus is represented by the area CP1B. This is only part of the total revenue of the firm which is indicated by the rectangle 0P1BQ1

The more elastic the supply curve, the smaller the amount of producer surplus. If the supply curve is perfectly elastic, producer surplus is zero since the price the firm is willing to supply their output at is also the ruling market price.

An increase in market demand would cause an increase in both market price and quantity leading an to rise in total producer surplus available to suppliers.This is shown in the diagram below