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Producer surplus

Author: Geoff Riley  Last updated: Sunday 23 September, 2012

Producer surplus is a measure of producer welfare

It is measured as 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 in the diagram below

Pm is the minimum price that this producer requires to supply the product to the market

As the price rises, there is a great incentive to supply – production will expand as a business moves up their supply curve

Assuming the the market has reached an equilibrium at quantity Q1 and price P1, then the level of producer surplus is shown by the shaded/labelled area.

Total revenue = price per unit x quantity sold = P1 x Q1

Producer surplus

Producer surplus and changes in demand and supply

We first consider the effects of a change in market supply – for example caused by an improvement in production technology or a fall in the cost of raw materials and components used in the production of a good or service

Producer surplus

We now consider the effects on producer surplus of a rise in market demand

Producer surplus





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