Producer surplus is the difference between the price a seller actually receives and the minimum price at which they would have been willing to sell (Mankiw, 2024). It measures the extra benefit producers get from selling at the market price. There are some key points to remember when considering producer surplus. First, the seller’s minimum acceptable price for the good or service. Then there is the market price of the good or service.
Formula
Producer Surplus = Market Price − Minimum Acceptable Price
Example 1: Individual Producer
Consider Farmer Jack, who is willing to sell a bushel of apples for a minimum of $12. If the market price is $20 per bushel, Farmer Jack receives more than the minimum amount he is willing to accept.
His producer surplus is:
$20 − $12 = $8
Therefore, Farmer Jack’s producer surplus is $8 per bushel.
Example 2: Multiple Producers
Consider three farmers who are willing to sell apples at different minimum prices.
Farmer Jack will sell a bushel for a minimum of $12.
Farmer Sue will sell a bushel for a minimum of $18.
Farmer Luke will sell a bushel for a minimum of $8.
Producer Surplus
Market price is $15 per bushel.
Farmer Jack:
$15 − $12 = $3 producer surplus
Because the market price is greater than his minimum acceptable price, Farmer Jack will sell his apples and receive $3 of producer surplus per bushel.
Farmer Sue:
Farmer Sue’s minimum acceptable price is $18, which is higher than the market price of $15. Therefore, she will not sell her apples. Her producer surplus is $0.
Farmer Luke:
$15 − $8 = $7 producer surplus
Because the market price is greater than his minimum acceptable price, Farmer Luke will sell his apples and receive $7 of producer surplus per bushel.
To calculate the total producer surplus for a group of producers, add the producer surplus of each producer who participates in the market.
Formula:
Total Producer Surplus = Total producer surplus = PS of consumer(1) + PS of consumer(2) + […] + PS of consumer(n)
For the three farmers:
Total Producer Surplus = $3 + $0 + $7 = $10
Therefore, the total producer surplus is $10.
Producer surplus measures the benefit producers receive when the market price is higher than the minimum price they are willing to accept. The higher the market price is relative to a producer’s minimum acceptable price, the greater the producer surplus.
Mankiw, N. G. (2024). Principles of Economics. Cengage Learning.
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