Producer Surplus

What Is Producer Surplus?

Producer surplus is the net benefit sellers gain from participating in a market: the difference between the price they actually receive and the minimum price they would have been willing to accept. On a supply-and-demand graph it is the area above the supply curve and below the market price, up to the quantity sold. Because the upward-sloping supply curve reflects producers' rising marginal costs, every unit sold at a price above its seller's minimum acceptable price earns surplus. A higher market price enlarges producer surplus; a lower price shrinks it. Producer surplus is the supply-side counterpart to consumer surplus.

Why It Matters

Producer surplus measures the value sellers capture from trade and, combined with consumer surplus, yields total surplus, economists' yardstick for a market's efficiency. At the competitive equilibrium with no externalities, total surplus is maximized and the allocation is efficient. Interventions that move a market away from equilibrium redistribute and often shrink this surplus: a binding price floor can raise producer surplus for those who still sell but creates a surplus of unsold goods and deadweight loss, while a price ceiling transfers surplus from producers to some consumers and destroys value overall. Tracking producer surplus helps analysts see who benefits from a policy, by how much, and how much total value a market intervention leaves on the table.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• What is producer surplus?
  The difference between what producers receive and the minimum they would accept — the area above the supply curve and below the market price
• In AP Microeconomics, what is true of total surplus at the competitive market equilibrium, absent externalities?
  The sum of consumer and producer surplus is maximized, and the outcome is allocatively efficient
• What effect does a tariff on an imported good generally have on domestic producers of that same good?
  They can charge a higher price and sell more, increasing producer surplus