Producer Surplus

Producer Surplus

Producer surplus is the amount by which the quantity that producers are willing and able to produce exceeds the quantity that consumers are willing and able to buy at a given price. In other words, it is the surplus of production over consumption.

Formula for Producer Surplus:

Producer Surplus = Qp - Qd

where:

• Qp is the quantity that producers are willing and able to produce
• Qd is the quantity that consumers are willing and able to buy

Explanation:

• When the quantity that producers are willing and able to produce (Qd) exceeds the quantity that consumers are willing and able to buy (Qs), there is a producer surplus.
• The producer surplus is created when there are excess units of production.
• The surplus units are typically sold at a lower price than the equilibrium price.
• The producer surplus is a measure of efficiency in the market.
• In a perfectly competitive market, the producer surplus is zero.

Example:

• Let’s say that the demand curve is given by the equation: Qd = 100 – 2P.
• Let’s also say that the supply curve is given by the equation: Qp = 2P.
• At the equilibrium price, Qd = Qs.
• If Qp exceeds Qd, there is a producer surplus.
• For example, if Qp = 120, then the producer surplus is 20 units.

Diagram:

[Image of a producer surplus]

In this diagram, the demand curve (Qd) is below the supply curve (Qs). The equilibrium quantity (Qe) is the quantity where Qd = Qs. The producer surplus (PS) is the area above the demand curve and below the supply curve.