Chapter 4
The producer surplus

Analogously to the consumer surplus, the producer surplus can be defined. In this case, the sellers’ benefit of participating in the market is considered.
The producer surplus is based on the following concept. The supply curve reflects the costs (a more detailed description of the different types of costs will be given in the chapter "Theory of the firm") of the producers, which is the minimum value that the individual sellers attribute to the good. For all sellers who produce and sell a good, this minimum value (production costs) is lower than the price they receive for it, otherwise they would not offer the product. If the costs are higher than the income, a loss would result. The benefit a producer gets from selling one unit of the good is the difference between the costs and the price he gets for it.
For example, if it costs a carpenter 500 to produce a sofa and the price he gets for it is 600, the difference (100) is the producer surplus. The producer surplus of an entire market is the sum of all individual producer surpluses.
Graphically, the producer surplus is represented by the area between the supply curve and the price line, since this area is the respective individual benefit (supply curve - price) multiplied by the quantity. Formally, this results in

RProduzenten =0Makt pakt A pdM,

where pakt is the equilibrium price and Makt the equilibrium quantity. The producer surplus is shown in color in the graphic above.
If the price rises from P1 to P2, the producer surplus increases, as can be seen in the graphic above. This increase consists of two components. Firstly, the producer surplus of the existing producers increases, since their income rises due to the price increase. Secondly, the quantity sold increases from Q1 to Q2 (either through new producers or an expansion of the supply of the already active sellers) and this new yield also generates producer surplus.

(c) by Christian Bauer
Prof. Dr. Christian Bauer
Chair of monetary economics
Trier University
D-54296 Trier
Tel.: +49 (0)651/201-2743