Producer’s Surplus (PS)

Producer’s Surplus (PS) refers to the difference between the price a producer actually receives for a good or service and the minimum amount they would be willing to accept to produce that good or service.

In essence:

Producer’s Surplus = Actual Revenue – Minimum Acceptable Revenue

It is a measure of producer welfare or economic benefit, representing the extra earnings producers receive above their marginal cost of production.

Graphical Representation

Producer’s surplus is visually represented in a supply and demand diagram:

• It is the area above the supply curve (which reflects marginal cost)

• And below the equilibrium price line

• From zero to the quantity sold

Illustration:

• The market equilibrium price (P)* is determined by the intersection of the demand and supply curves.

• The area between the supply curve and the horizontal line at Pe  (up to the equilibrium quantity Qe) is the producer surplus.

As the market price increases, the producer surplus increases, because:

• More units are sold at higher prices.

• The difference between the price received and marginal cost widens.

Formula for Producer’s Surplus

Where:

• Pe  = Market equilibrium price (constant)

• Qe  = Equilibrium quantity

• S(x)   = Supply function (marginal cost function)

Explanation:

•  Pe Qe  = Total revenue received by the producer (price × quantity)

•= Total variable cost of production

• Their difference gives the producer’s surplus