Using the Supply Curve to xMlasurl Producer Surplus

lust as consumer surplus is closely related to the demand curve, producer surplus is closely related to the supply curve. To see how, let's continue our example.

We begin by using the costs of the four painters to find the supply schedule for painting services. The table in Figure 4 shows the supply schedule that corresponds to the costs in Table 2. If the price is below $500, none of the four painters is willing to do tlu; job, so the quantity supplied is zero. If the price is between $500 and $ttXI,only Grandma is willing to do the job, so the quantity supplied is 1-If the price b between $600 and 3800, Grandma and Georgia are willing to do the job, so the quantity supplied is 2, and so on. Thus, the supply schedule is derived from the costs of the four painters.

The graph in Figure 4 shows the supply curve that corresponds to this supply schedule. Note that the height of the supply curve b related to the sellers' costs. At any quantity, the price given by Ihe supply curve shows Ihe cost of the marginal teller, the seller who would leave the market first if the price were any lower. At a quantity of 4 houses, for instance, the supply curve has a height of $900, the cost that Mary (the marginal seller) incurs to provide her painting services. At a quan tity of 3 houses, the supply curve has a height of 3800, the cost that Frida (who is now the marginal seller) incurs.

Because the supply curve reflects sellers' costs, we can use it to measure producer surplus- Figure 5 uses the supply curve to compute producer surplus in our two examples. In panel (a), we assume that the price is $600. In this case, the quantity supplied is 1. Note that the area below the price and above the supply curve equals 5100. This amount is exactly the producer surplus we computed eartier for Grandma.

Panel (b) of Figure 5 shows producer surplus at a price of $800. In this case, the area below the price and above the supply curve equals the total area of the two rectangles. This area equals $500, the producer surplus we computed earlier for Georgia and Grandma when two houses needed painting.

The lesson from this example applies to all supply curves: The <trea Mem' the price iirttf above the supply curtv measures the producer surplus in a market. The logic is straightforward: The height of the supply curve measures sellers' costs, and the difference between the price and the cost of production is each seller's producer surplus. Thus, the total area is the sum of the producer surplus of all sellers.

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