Economics
Producer Surplus Formula
Producer surplus is a measure of the benefit received by producers when the market price is higher than the minimum price they are willing to accept for their goods or services. The formula for producer surplus is the difference between the actual price received by producers and the minimum price they are willing to accept. It is calculated as the area above the supply curve and below the market price.
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10 Key excerpts on "Producer Surplus Formula"
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
Consumer surplus is the area labeled F—that is, the area above the market price and below the demand curve. 74 3 • Demand and Supply Access for free at openstax.org FIGURE 3.23 Consumer and Producer Surplus The somewhat triangular area labeled by F shows the area of consumer surplus, which shows that the equilibrium price in the market was less than what many of the consumers were willing to pay. Point J on the demand curve shows that, even at the price of $90, consumers would have been willing to purchase a quantity of 20 million. The somewhat triangular area labeled by G shows the area of producer surplus, which shows that the equilibrium price received in the market was more than what many of the producers were willing to accept for their products. For example, point K on the supply curve shows that at a price of $45, firms would have been willing to supply a quantity of 14 million. The supply curve shows the quantity that firms are willing to supply at each price. For example, point K in Figure 3.23 illustrates that, at $45, firms would still have been willing to supply a quantity of 14 million. Those producers who would have been willing to supply the tablets at $45, but who were instead able to charge the equilibrium price of $80, clearly received an extra benefit beyond what they required to supply the product. The extra benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept is called producer surplus. In Figure 3.23, producer surplus is the area labeled G—that is, the area between the market price and the segment of the supply curve below the equilibrium. The sum of consumer surplus and producer surplus is social surplus, also referred to as economic surplus or total surplus. In Figure 3.23 we show social surplus as the area F + G. Social surplus is larger at equilibrium quantity and price than it would be at any other quantity.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2014(Publication Date)
- Openstax(Publisher)
Producer surplus is the gap between the price for which producers are willing to sell a product, based on their costs, and the market equilibrium price. Social surplus is the sum of consumer surplus and producer surplus. Total surplus is larger at the equilibrium quantity and price than it will be at any other quantity and price. Deadweight loss is loss in total surplus that occurs when the economy produces at an inefficient quantity. SELF-CHECK QUESTIONS 1. Review Figure 3.4. Suppose the price of gasoline is $1.60 per gallon. Is the quantity demanded higher or lower than at the equilibrium price of $1.40 per gallon? And what about the quantity supplied? Is there a shortage or a surplus in the market? If so, of how much? 2. Why do economists use the ceteris paribus assumption? 3. In an analysis of the market for paint, an economist discovers the facts listed below. State whether each of these changes will affect supply or demand, and in what direction. a. There have recently been some important cost-saving inventions in the technology for making paint. b. Paint is lasting longer, so that property owners need not repaint as often. c. Because of severe hailstorms, many people need to repaint now. d. The hailstorms damaged several factories that make paint, forcing them to close down for several months. 4. Many changes are affecting the market for oil. Predict how each of the following events will affect the equilibrium price and quantity in the market for oil. In each case, state how the event will affect the supply and demand diagram. Create a sketch of the diagram if necessary. a. Cars are becoming more fuel efficient, and therefore get more miles to the gallon. b. The winter is exceptionally cold. c. A major discovery of new oil is made off the coast of Norway. d. The economies of some major oil-using nations, like Japan, slow down. e. A war in the Middle East disrupts oil-pumping schedules. f. Landlords install additional insulation in buildings.
eBook - ePubMicroeconomic Foundations I
Choice and Competitive Markets
- David M. Kreps(Author)
- 2012(Publication Date)
- Princeton University Press(Publisher)
to the left of. The starting and ending points for this “area under the curve” also aren’t so clear, but when it comes to application, economists are primarily concerned with changes in producer surplus. So let me give the following as a formal definition:Definition 12.5. Fixing all prices except for the price p1 of some specific good, the supply “function” of which is given by (p1 ), the change in producer surplus when the price of the good shifts from to isThe superscripts n and o are mnemonics for new and old. Of course, in this integral, if price exceeds that of , you should understand this integral as being the negative of the integral with the upper limit being the higher price. What about values of p1 for which (p1 ) is not well defined? Since there are at most a countable number of such values, they don’t affect the integral. And we have:Corollary 12.6. The change in producer surplus is the sum of the changes in the profits of the firms that supply this good, resulting from the change in prices.Proof. Let f = 1, …, F ennumerate the firms that make up this industry, so that is the unique supply by firm f at price p1 , for all points p1 where is singleton. (We don’t worry about at prices where one or more firms have nonsingleton , as they don’t affect the value of the integral.) Therefore, the change in producer surplus when price changes from to isand by Corollary 12.4, the terms being summed on the right-hand side are just the changes in the profits of the firms, firm by firm.Warning
The warning I’ve been threatening to give can now be given. In many applications of the concept of producer surplus, the “industry supply curve” is estimated empirically. You must be careful about this. Imagine an industry filled with small, price-taking firms. In particular, imagine that one of the inputs to the production process used by the firms in this industry is supplied by another industry, and the supply of that input is upward sloping. To be clear, no one firm in this industry buys enough of this input to affect its price materially, and so all firms in the industry have competitive conjectures about its price: They believe that they can buy as much as they want at whatever is the prevailing price, and they choose their production plans to be profit maximizing, based on that belief. But on an industry basis, this industry buys enough of this factor of production so that if the level of output in this industry changes, demand for the factor input will increase enough to drive up its price.
- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Producer surplus is the gap between the price for which producers are willing to sell a product, based on their costs, and the market equilibrium price. Social surplus is the sum of consumer surplus and producer surplus. Total surplus is larger at the equilibrium quantity and price than it will be at any other quantity and price. Deadweight loss is loss in total surplus that occurs when the economy produces at an inefficient quantity. SELF-CHECK QUESTIONS 1. Review Figure 3.4. Suppose the price of gasoline is $1.60 per gallon. Is the quantity demanded higher or lower than at the equilibrium price of $1.40 per gallon? What about the quantity supplied? Is there a shortage or a surplus in the market? If so, how much? 2. Why do economists use the ceteris paribus assumption? 3. In an analysis of the market for paint, an economist discovers the facts listed below. State whether each of these changes will affect supply or demand, and in what direction. a. There have recently been some important cost-saving inventions in the technology for making paint. b. Paint is lasting longer, so that property owners need not repaint as often. c. Because of severe hailstorms, many people need to repaint now. d. The hailstorms damaged several factories that make paint, forcing them to close down for several months. 4. Many changes are affecting the market for oil. Predict how each of the following events will affect the equilibrium price and quantity in the market for oil. In each case, state how the event will affect the supply and demand diagram. Create a sketch of the diagram if necessary. a. Cars are becoming more fuel efficient, and therefore get more miles to the gallon. b. The winter is exceptionally cold. c. A major discovery of new oil is made off the coast of Norway. d. The economies of some major oil-using nations, like Japan, slow down. e. A war in the Middle East disrupts oil-pumping schedules. f. Landlords install additional insulation in buildings.
eBook - PDF- John Leach(Author)
- 2003(Publication Date)
- Cambridge University Press(Publisher)
The new rule provides a short cut for making the same calculation. The increase in the firm’s profits when it produces another unit of goods – its marginal profits – is the difference between its marginal revenue and its marginal cost. Thus, marginal profits are equal to the vertical distance between the marginal revenue (i.e., price) and marginal Consumer and Producer Surplus 82 price Supply Demand quantity of ale A B C D E a a p p * ^ ^ * O Figure 5.2: Two Equilibria. In the absence of intervention, a ∗ pints of ale are traded at the price p ∗ . If the government restricts the sale of ale to a pints by placing a limit on each firm’s sales, the price rises to p . cost curves. The new rule allows us to directly calculate the increase in profits as the area between the two curves, between q 0 and q 1 . 5.2 SURPLUS Trading in organized markets is beneficial to both the buyer and the seller, and these benefits are measured by consumer surplus and producer surplus, respectively. This section defines both concepts and then describes the way in which they are calculated. 2 Surplus and prices are measured in the same units. If prices are expressed in units of a numeraire, surplus will also be measured in the numeraire. If the prices are currency prices, surplus will be measured in the same currency. In this chapter, prices and surplus will be measured in dollars. The consumer surplus in each market is the difference between the dollar value to the buyers of the goods traded in that market, and the amount that the buyers actually paid for these goods. The latter amount is easily calculated, but what is the former amount? The height of the demand curve at any level of output represents the value of the last unit of output to the purchaser of that unit. Suppose, for example, that ale is infinitely divisible – can be sold drop by drop – and that its demand is described by the demand curve in Figure 5.2.
eBook - PDF- Irvin B. Tucker, Irvin Tucker(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
KEY CONCEPTS Consumer surplus Producer surplus Deadweight loss SUMMARY • Consumer surplus measures the value between the price consumers are willing to pay for a prod-uct along the demand curve and the price they actually pay. • Producer surplus measures the value between the actual selling price of a product and the price along the supply curve at which sellers are willing to sell the product. Total surplus is the sum of consumer surplus and producer surplus. • Deadweight loss is the result of a market that operates in disequilibrium. It is the net loss of both consumer and producer surplus resulting from underproduction or overproduction of a product. SUMMARY OF CONCLUSION STATEMENTS • Total consumer surplus measured in dollars is represented by the total area under the market demand curve and above the equilibrium price. • Total producer surplus measured in dollars is represented by the total area under the equilib-rium price and above the supply curve. • The total dollar value of potential benefits not achieved is the deadweight loss resulting from too few or too many resources used in a given market. APPENDIX TO CHAPTER 3 | Consumer Surplus, Producer Surplus, and Market Efficiency 95 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. ............................................................................................................................................................................................................................................. STUDY QUESTIONS AND PROBLEMS 1. Consider the market for used textbooks.
eBook - PDFMicroeconomics
Equilibrium and Efficiency
- Thijs ten Raa(Author)
- 2017(Publication Date)
- Red Globe Press(Publisher)
Hence, the efficient price of the product must be c , the marginal cost – otherwise supply would be infinite or zero, which violates any equilibrium with positive and finite demand.) Another, simple way to confirm this marginal cost pricing rule for efficiency involves the concept of total surplus. By definition, total surplus = consumer sur-plus + producer surplus (where the latter term is profit). Hence, total surplus 222 Putting the Model to Use Price D ( p ) p c Quantity Figure 11.2 At price p , consumer surplus is the area between the price line and the demand curve. Producer surplus is the rectangular area between the price and cost lines. As p decreases, consumer surplus (shaded area) overtakes producer surplus, and total surplus increases as the left edge of the combined area encompassing consumer and producer surplus shifts to the right. equals CS ( p ) + pD ( p ) − C ( D ( p )). This expression is maximized by setting the derivative equal to zero and invoking equation (5.3) and the chain rule (1.13): − D ( p ) + [ pD ( p )] − C ( D ( p )) D ( p ) = 0. According to the product rule (1.9) and division by D ( p ) we obtain p = MC , which is the efficient price c when returns to scale are constant; this result holds for non-constant returns to scale. If the price is higher than marginal cost, then the quantity of the product supplied is restricted. Consumers would be willing to pay even more than the cost of production, c , for extra units of the product. Figure 11.2 illustrates this situation. The shaded area in Figure 11.2 is consumer surplus, and the box directly below that area is producer surplus. Total surplus – that is, the combination of the gray area and the rectangle under it – is less than the total surplus attained when the price decreases to c . In fact, the difference between the two is represented by the area of the little triangle on the right, Harberger’s triangle – or dead-weight loss.
eBook - PDF- Graham Mallard(Author)
- 2017(Publication Date)
- Red Globe Press(Publisher)
It’s always important to check answers such as these. This is easy to do in this case since the market demand curve is linear and so the consumer surplus is a simple triangle with height 12, base 300 and so area of 0.5×12×300=1800. As with differentiation, you should be comfortable with and fluent in integra-tion. Unfortunately, space precludes a full treatment of the technique here, but you can find sections outlining the relevant rules in all good mathematics for economics textbooks (see Chapter 15 for suggestions). Once the rules are mas-tered, integration is straightforward. BOX 7.3: producer surplus We can use the same procedure to calculate producer surplus – calculating the size of the area above the market supply curve and beneath the market price up to the final unit traded. With a linear market supply curve producer surplus can be 2 2 introducing smaller-scale analysis: the microeconomic world 116 Quantity supplied (bottles) Price (£) 110 300 P = 50 + 0.2Q s 50 Producer surplus Figure B7.3 Producer surplus easily calculated by computing the area of the triangle using the 1 __ 2 × base × height method. For market supply curves that are actually curves, it’s more complicated because we need to calculate the area under the curve using integration and to then subtract this from the rectangle representing producerrevenue. The general rule for calculating producer surplus, then, is given as Equation B7.3.1, in which Q* s is the quantity bought and sold in the market,‘equation’ is the equation of the market supply curve, and P* is the market price. Please note: as with consumer surplus, it’s important to use the inverse market supply curve equation if integrat-ing with respect to the quantity bought and sold. You can use the equation for the normal market supply curve, but you then need to integrate it with respect to the market price rather than quantity.
eBook - PDF- Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Brian Roach, Mariano Torras, Jonathan Harris, Julie Nelson(Authors)
- 2019(Publication Date)
- Routledge(Publisher)
7. Match each concept in Column A with an example in Column B. Consumer Maximum Willingness to Pay #1 $550 #2 $530 #3 $490 #4 $440 #5 $420 #6 $370 #7 $350 #8 $310 Rent (per month) Quantity of apartments supplied $800 100 $700 80 $600 60 $500 40 $400 20 $300 0 Column A Column B a. Consumer surplus 1. Profits b. The government mandates that the price of milk must be at least $3 per gallon 2. A price ceiling c. Marginal change 3. An increase in demand of one unit d. Producer surplus 4. A loss in social welfare that occurs when a market is not in equilibrium e. Deadweight loss 5. Part of the psychic benefits of buying something f. The government mandates that the price of gas can be no higher than $4 per gallon 6. A school of economics that opposes government regulation g. Laissez-faire economics 7. A price floor C HAPTER 6 – W ELFARE A NALYSIS 146 N OTES 1. The “magnified” demand curve in Figure 6.2 is not actually the same as the one in Figure 6.1 . In Figure 6.2 we use a different slope, in order to focus on a price change that causes the quantity demanded to decrease by exactly one cup. 2. If you have studied calculus, you can use integration to determine areas under demand (and supply) curves. This is done in more advanced economics courses. 3. Technically speaking, this is not quite true. From a marginal perspective, producer surplus is the difference between the price of a product and its marginal cost. Some of this surplus, however, may be used to pay fixed expenses and thus not represent profit to the producer. 4. We have again adjusted the slope of the curve in order to focus on a change in quantity of one. 5. Note that there may be points where the marginal production cost exactly equals the price. Thus the pro-ducer would not increase profits by offering the unit for sale but would not lose money either. In this case, we would say that the producer is indifferent between selling and not selling the unit.
eBook - PDFMicroeconomic Theory
Basic Principles and Extensions
- Walter Nicholson, Christopher Snyder(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
With these parameters, the short-run supply relationship is q 5 10 P /3 and the shut-down price is zero. Hence at a price of P 5 12, producer surplus is p roducer surplus 5 3 12 0 10 P 3 dP 5 10 P 12 6 ` 12 0 5 240 . (11.43) This precisely equals short-run profits at a price of 12 1 π 5 0 2 plus short-run fixed costs 1 5 vk 1 5 3 # 80 5 240 2 . If price were to rise to (say) 15, then producer surplus would increase to 375, which would still consist of 240 in fixed costs plus total profits at the higher price 1 P 5 135 2 . QUERY: How is the amount of short-run producer surplus here affected by changes in the rental rate for capital, v ? How is it affected by changes in the wage, w ? 11.6 PROFIT MAXIMIZATION AND INPUT DEMAND Thus far, we have treated the firm’s decision problem as one of choosing a profit- maximizing level of output. But our discussion throughout has made clear that the firm’s output is, in fact, determined by the inputs it chooses to use, a relationship that is summa-rized by the production function q 5 f 1 k , l 2 . Consequently, the firm’s economic profits can also be expressed as a function of only the inputs it uses: π 1 k , l 2 5 Pq 2 C 1 q 2 5 Pf 1 k , l 2 2 1 vk 1 wl 2 . (11.44) 12 In Table 10.2, we showed that if q 5 40, then SAC 5 12. Hence zero profits are also indicated by P 5 12 5 SAC . Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-300 382 Part 4: Production and Supply Viewed in this way, the profit-maximizing firm’s decision problem becomes one of choos-ing the appropriate levels of capital and labor input. 13 The first-order conditions for a max-imum are ∂π ∂ k 5 P ∂ f ∂ k 2 v 5 0 , (11.45) ∂π ∂ l 5 P ∂ f ∂ l 2 w 5 0 . (11.46) These conditions make the intuitively appealing point that a profit-maximizing firm should hire any input up to the point at which the input’s marginal contribution to reve-nue is equal to the marginal cost of hiring the input.
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