Producer surplus is the amount a seller receives from a sale that exceeds the minimum amount they need to receive to produce the good. It is measured by the area between the supply curve and price. A higher market price increases total producer surplus both for existing producers and by incentivizing new producers to enter the market. The competitive market equilibrium maximizes total welfare by equalizing quantity supplied and demanded, allowing goods to be produced by the lowest cost suppliers and purchased by those valuing them the most.

1. Group no. 2
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2. PRODUCER SURPLUS
• Willingness to sell is the minimum amount that a
seller will sell a good for.
• It measures the cost to the seller of producing the
good or service.
• Producer surplus is the price the seller receives
seller’s for a good minus the amount it cost to
produce it.
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3. Using the Supply Curve to Measure
Producer Surplus
• The market supply curve depicts the various
quantities that sellers would be willing and able to
sell at different prices.
• The area below the price and above the supply
curve measures the producer surplus in a market.
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4. How the Price Affects Producer Surplus
(a) Producer Surplus at Price P
Price
Supply
P1
B
C
Producer
surplus
A
0
Q1
Quantity
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5. How higher prices raises PS
Sellers are willing to sell 25 pack of
apple juice at Rs.10 a pack and here
Sellers cost is Rs.8. buyers are
willing to purchase these pack Rs.10
10 Rs. for 25 pack
25 pack
per pack. If the Sellers sells all of the
1 pack
pack to buyers for Rs.10 (1st
condition), it will receive Rs.250.
15 Rs. For 25 & 30
30 pack
• In 2nd condition Sellers are willing to
1 pack
sell 30 pack of apple juice at Rs.15 a
Producers surplus :- (amount received – cost) pack by the amount it was willing to
1st condition- (10*25 – 8*25)
accept, (in this case Rs.15), and you
Producers surplus =(250 – 200) 50 Rs.
find it will receive Rs.375 (by selling
nd
2 condition- (15*25 – 8*25)
25 pack) & 450 (by selling 30 pack).
Producers surplus =(375 – 200) 175 Rs.
(On 30 QD) – PS = (450 – 200) 250 Rs.
Price
Quantity Quantity
demanded supplied
•
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6. How the higher Price raises Producer Surplus
(b) Producer Surplus at Price P
Price
Supply
Additional producer
surplus to initial
producers
P2
15
P1
10
D
B
Initial
producer
surplus
E
F
C
Producer surplus
to new producers
A
0
25
Q1
30
Q2
Quantity
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7. Welfare Economics
• Buyers and sellers receive benefits from taking
part in the market.
• The equilibrium in a market maximizes the total
welfare of buyers and sellers.
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8. MARKET EFFICIENCY
• Goods consumed by buyers who value them most highly
measured by WTP (D).
• Goods produced by sellers with lowest opportunity cost
of production measured by WTS (S).
• Sum of CS & PS, total well-being is maximized.
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9. • Buyers
• Sellers
P
Qd
Qs
3.50
3.70
3.90
4.10
4.30
4.50
4.70
4.90
5.10
35
33
31
29
27
23
18
11
4
4
11
18
23
27
29
31
33
35
In the Chips

10. • Buyers
Market Forces & Equilibrium
• Sellers
• Price squeezes to where Qs = Qd and the market clears.
• This price facilitates all transactions that can improve
the well-being of market participants.
• Goods purchased by those with highest value.
• Goods produced by those with lowest opportunity cost.
• The well-being of society is maximized.
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11. • Buyers
Market Forces & Equilibrium
Total Quantity 4
IPHONE 5
• Day 1When price is
Rs.40,000
• Day 2 When price is
Rs.20,000
• Day 3When price is
Rs.10,000
• Day 4 When price is
Rs.5,000
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12. Market Forces & Equilibrium
• Sellers
Total Quantity 4
• Day 1When price is
Rs.5,000(Cost)
• Day 2 When price is
Rs.10,000
• Day 3When price is
Rs.20,000
• Day 4 When price is
Rs.40,000
IPHONE 5
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13. Consumer and Producer Surplus in the Market Equilibrium
Price A
D
Rs.40,000
Supply
Consumer
surplus
Rs.20,000
E
Producer
surplus
Rs.10,000
Demand
Rs.5,000
0
B
C
1
2
3
4
Quantity
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14. Summary
• Producer surplus measures the benefit sellers and Consumer surplus
measures the benefit buyers get from participating in a market.
• An allocation of resources that maximizes the sum of consumer surplus
and producer surplus is efficient.
• The competitive market equilibrium outcome maximizes the sum of
consumer surplus and producer surplus and thus maximizes the wellbeing of market participants.
• All transactions that could possibly improve the well-being of market
participants have taken place.
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