Producer’s Surplus

Producer surplus is defined as the difference between the amount the producer is willing to supply goods for and the actual amount received by him when he makes the trade. Producer surplus is a measure of the producer’s welfare. It is shown graphically as the area above the supply curve and below the equilibrium price.

The producers may be willing to sell their products for a lower price than the prevailing market price. If the market price is higher than where producers expect to price their items, then the difference is called the producers’ surplus. In the sketch shown below, the shaded region represents the producers’ surplus. 

Here the producer surplus is shown in a shaded area. As the price increases, the incentive for producing more goods increases, thereby increasing producer surplus.

The difference between the amount received by the producers (i.e.,) and the amount they would have received at the price level determined by the supply curve (the area under the supply curve from zero to ) is called the producer’s surplus. 

Producer surplus = Area above the supply curve and below the line, .

The formula for computing producers’ surplus is given by:

In this formula,  is the supply function,  represents the unit market price and  represents the quantity supplied. The producer’s surplus is the area of the region bounded above by the line that represents the price and below by the supply curve.       

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