4.b. Producer Surplus

Producer Surplus is the seller's profit from selling a good. Alternatively, we could say it is the excess of what a buyer charges over what he would have been barely willing to accept. Graphically, it is the area above the supply curve, below the price, and left of the quantity sold.

Example: A seller produces a good for $4 and sells it for $7. He earns a profit (producer surplus) of $3 (=7-4).

Figure 4.b.1

In Figure 4.b.1, we imagine 4 sellers: A, B, C, and D. A would be barely willing to sell a unit of the good for $1, but if the going price of the good is $4, A earns a profit (producer surplus PS) of $3. B would sell for $2, but since he charges $4 he earns a profit of $2. C earns a profit of $1, while D, the marginal seller, earns no profit, since he is barely willing to sell for the going price of $4.

Figure 4.b.2

In Figure 4.b.2, we see that at a price of $7, producer surplus is $20 (blue). If the price rises to $10, then existing sellers gain (3x8)=$24 each (yellow) while new sellers gain (3x4)/2=$6 (green).