Producer Surplus basics

Copyright © 2004 South-Western

Group no. 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.


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.

How the Price Affects Producer Surplus

Copyright©2003 Southwestern/Thomson Learning

Producersurplus

Quantity

(a) Producer Surplus at Price P

Price

0

Supply

B

A

C

Q1

P1


How higher prices raises PS

Price Quantity demanded

Quantity supplied

10 Rs. for 1 pack

25 pack 25 pack

15 Rs. For 1 pack

25 & 30 30 pack

• 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 per pack. If the Sellers sells all of the pack to buyers for Rs.10 (1st condition), it will receive Rs.250.

• In 2nd condition Sellers are willing to sell 30 pack of apple juice at Rs.15 a pack by the amount it was willing to accept, (in this case Rs.15), and you find it will receive Rs.375 (by selling 25 pack) & 450 (by selling 30 pack).

Producers surplus :- (amount received – cost)1st condition- (10*25 – 8*25)Producers surplus =(250 – 200) 50 Rs.2nd condition- (15*25 – 8*25)Producers surplus =(375 – 200) 175 Rs. (On 30 QD) – PS = (450 – 200) 250 Rs.

How the higher Price raises Producer Surplus


Quantity

(b) Producer Surplus at Price P

Price

0

P1B

C

Supply

A

Initialproducersurplus

25Q1

P2

30Q2

Producer surplusto new producers

Additional producersurplus to initialproducers

D EF15

10


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.


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.

• Buyers • Sellers

P Qd Qs3.50 35 43.70 33 113.90 31 184.10 29 234.30 27 274.50 23 294.70 18 314.90 11 335.10 4 35

In the Chips


• 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.

Market Forces & Equilibrium• Buyers • Sellers


Market Forces & Equilibrium

• Day 1When price is Rs.40,000

• Day 2 When price is Rs.20,000



• Buyers

IPHONE 5

Total Quantity 4


Market Forces & Equilibrium

• Day 1When price is Rs.5,000(Cost)




• Sellers

Total Quantity 4

IPHONE 5


Consumer and Producer Surplus in the Market Equilibrium


Producersurplus

Consumersurplus

Price

0 Quantity

Supply

Demand

A

C

B

D

ERs.20,000

21 3

Rs.40,000

Rs.10,000

Rs.5,000

4


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 well-being of market participants.

• All transactions that could possibly improve the well-being of market participants have taken place.

Producer Surplus basics

Education

lowest opportunity

000day 3when

equilibriumday

market forces

1st condition

producer surplus

consumer surplus

producers