Loading the player...

What is a 'Producer Surplus'

A producer surplus is a difference between how much of a good the producer is willing to supply versus how much he receives in the trade. The difference or surplus amount is the benefit the producer receives for selling the good in the market. A producer surplus is generated by market prices in excess of the lowest price producers would otherwise be willing to accept for their goods.

BREAKING DOWN 'Producer Surplus'

A producer surplus is shown graphically below as the area above the producer's supply curve that it receives at the price point (P(i)), forming a triangular area on the graph. The size of the producer surplus and its triangular depiction on the graph increases as the market price for the good increases, and decreases as the market price for the good decreases.

Producer Surplus

A producer surplus combined with a consumer surplus equals overall economic surplus or the benefit provided by producers and consumers interacting in a free market as opposed to one with price controls or quotas. If a producer could price discriminate correctly, or rather charge every consumer the maximum price the consumer is willing to pay, then the producer could capture the entire economic surplus. In other words, producer surplus would equal overall economic surplus.

Example of Producer Surplus

Say a producer is willing to sell 500 widgets at $5 each and consumers are willing to purchase these widgets for $8 each. If the producer sells all of the widgets to consumers for $8, it receives $4,000. To calculate the producer surplus, subtract the amount the producer received by the minimal amount it was willing to accept, in this case, $2,500. The producer surplus is $1,500, or $4,000 - $2,500. It is not static and may increase or decrease as the market price increases or decreases.

Impact on Producer Surplus

Producers would not sell products if they could not get at least the marginal cost to produce those products. The supply curve as depicted in the graph above represents the marginal cost curve for the producer. As such, the producer surplus is the difference between the price received for a product and the marginal cost to produce it. From an economics standpoint, marginal cost includes opportunity cost. In essence, an opportunity cost is a cost of not doing something different such as producing a separate item.

The existence of producer surplus does not mean there is an absence of a consumer surplus. The idea behind a free market that sets a price for a good is that both consumers and producers can benefit, with consumer surplus and producer surplus generating greater overall economic welfare. Market prices can change materially due to consumers, producers, a combination of the two or other outside forces. As a result, profits and producer surplus may change materially due to market prices.

RELATED TERMS
  1. Budget Surplus

    A budget surplus is a situation in which income exceeds expenditures. ...
  2. Consumer Surplus

    Consumer surplus is an economic measure of consumer satisfaction, ...
  3. Capital Surplus

    Capital surplus is equity which cannot otherwise be classified ...
  4. Current Account Surplus

    A current account surplus is a positive current account balance, ...
  5. Adjusted Surplus

    Adjusted surplus is one indication of an insurance company's ...
  6. White List States

    White List States are those that permit the addition of specialized ...
Related Articles
  1. Insights

    Germany, Not China, Is the U.S.'s Big Trade Threat

    While Trump is focused on China and Mexico, Germany is likely a bigger threat to American exporters.
  2. Investing

    Finding Dirty Surplus Items on an Income Statement

    Dirty surplus items skew net income. Knowing how to account for them gives you a cleaner picture.
  3. Insights

    The Balance Of Trade

    The balance of trade is the difference between a country’s imports and exports. A trade deficit occurs when a country buys or imports more goods from other countries than it sells or exports. ...
  4. Insights

    Exploring the Current Account in the Balance of Payments

    Learn how a country's current account balance reflects the country's economic health.
  5. Investing

    Oil Could Hit $80 by End of 2018: Natixis

    While 'geopolitical risk' is back, a spike in production threatens to push the market into surplus.
  6. Insights

    The Pros & Cons of a Trade Deficit

    Is a trade deficit, also known as a current account deficit, beneficial or detrimental to a country's economy?
  7. Investing

    How Long Can Gas Stay Cheap?

    The current gas prices means a lot for the economy and our pockets. Let's explore how long we can expect gas prices to be low, what affects gas prices, and what changes might be in store.
  8. Insights

    Is The EU Holding Germany Back?

    As Germany agrees to initiate bailout talks with Greece once again, could all of the EU's economic turmoil result in Germany being better off alone?
RELATED FAQS
  1. What is the difference between consumer surplus and economic surplus?

    Learn the difference between consumer surplus and economic surplus, how the concepts are related and the important theoretical ... Read Answer >>
  2. What is the difference between marginal benefit and marginal cost?

    Understand the difference between marginal benefit and marginal cost. Learn how and why both marginal cost and marginal benefit ... Read Answer >>
  3. What impact does the balance of trade have on GDP calculations?

    Read about the impact of the balance of trade on a nation's gross domestic product, and why the figures involved in each ... Read Answer >>
  4. What are the different types of price discrimination and how are they used?

    Learn the difference between the three major types of price discrimination and how each is used in practical business applications. Read Answer >>
  5. What's the difference between production cost and manufacturing cost?

    Learn more about fixed and variable expenses incurred by businesses. Find out how production and manufacturing costs impact ... Read Answer >>
  6. What is the difference between absolute and comparative advantage?

    Learn about the difference between absolute and comparative advantage and how these two key economic concepts help shape ... Read Answer >>
Trading Center