Producer Surplus

Producer Surplus

Producer surplus is the difference between the price producers are willing to accept for a product and the actual market price. It is a measure of the welfare of the producer and a rise means an increase in the producer’s welfare. The producer surplus is represented by the area above the supply curve and below the market price. In Figure 1 below, the producer surplus is the area of the triangle PKO.


Figure 1: Producer surplus

Graph showing producer surplus


Change in producer surplus

The amount of producer surplus changes as a result of a change in demand or supply. There is a new equilibrium price as a result of a change in demand or supply. Therefore, the area showing the producer surplus will increase or decrease. A decrease in demand caused by a reduction in income will shift the demand curve from D1 to D2 (Figure 2 below); the equilibrium price decreases from P1 to P2 and the equilibrium quantity reduces from Q1 to Q2. Consequently, the producer surplus decreases from P1KO to P2LO. 

Figure 2: The effect of decrease in demand on producer surplus

Graph showing the effect of decrease in demand on producer surplus

An increase in supply  due to subsidy  shifts the supply curve rightward from S1 to S2. The price decreases from P1 to P2 while quantity increased from Q1 to Q2. The producer surplus  increases from P1ST to P2UO.

Figure 3: The effect of increase in supply on producer surplus

Graph showing effect of increase in supply on producer surplus