Info

«1 higher price? The concept of producer surplus offers a precise answer to this question.

Figure h shows a typical upward-sloping supply curve that would arise in a market with many sellers- Although this supply curve differs in shape from the previous figure, we measure producer surplus in the same way: Producer surplus is the area below the price and above the supply curve. In panel (a), the price is P„ and producer surplus is the area of triangle ABC.

Panel (b) shows what happens when the price rises from P, to P.- Producer surplus now equals area ADF. This increase in producer surplus has two parts. First, those sellers who were already selling Q, of the gtx>d at the lower price P, are better off because they now get more for what they sell- The increase in producer surplus for existing sellers equals the area of the rectangle BCED. Second, some new sellers enter the market because they are willing to produce the good at the higher price, resulting in an increase in the quantity supplied from Q, to Q:. The producer surplus of these newcomers »the area of the triangle CEF.

As this analysis shows, we use producer surplus to measure the well-being of sellers in much the same way as we use consumer surplus to measure the well-being of buyers. Because these two measures of economic welfare are so similar, it is natural to use them together. Anil indeed, that is exactly what we do in the next sectk>n.

QUICK QUIZ Draw a supply curve fo* turkey. In your ^agrom. show a price of turkey and the producer surplus at that price. Explain in words what this produce-r surplus measures.

The Secrets Of Winning Business Grants

The Secrets Of Winning Business Grants

Why Some Grant Applications Almost Always Win A Double Take And Get Approved More Often! How To Write A Winning Grant Application In One Evening. Are you looking to secure extra money for your business venture?

Get My Free Ebook


Post a comment