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### Course: AP®︎/College Microeconomics>Unit 2

Lesson 6: Market equilibrium and consumer and producer surplus

# Producer surplus

Producer surplus is the difference between the price a producer gets and its marginal cost. Explore the concepts of supply and demand, opportunity cost, and producer surplus in the context of a berry farm, learning how changes in quantity produced affects the price needed to incentivize producers, and how producers benefit when the market price is higher than their opportunity cost. Created by Sal Khan.

## Want to join the conversation?

• At he talked about the producer surplus but i don't really understand it…..can i be given another example to cite a case of producer surplus?
• Producer surplus is the benefit that firms receive by getting more for their product than the minimum they were willing to accept. Let's use an example.

Say I'm selling a camera and you want to buy it. I am willing to sell it for no less than \$100. You are willing to buy it for no more than \$200. We settle on a price of \$150 (of course, we don't tell each other our bottom lines).

I get \$50 producer surplus, because I sold it for \$50 more than my minimum. You get \$50 consumer surplus, because you got it for \$50 less than your maximum.

Now, expand this concept to the whole market. Each consumer will accept a different price, which is how we end up with the downward-sloping demand curve (as price goes up, less people are willing to buy; let's say 10 people would buy for no more than \$10, 9 people would buy for no more than \$20, 8 people would buy for no more than \$30, etc.). Each producer will sell for a different minimum price, which gives us an upward-sloping supply curve (as price goes up, more firms are willing to sell; let's say 2 firms will sell for no less than \$10, 3 firms will sell for no less than \$20, 3 firms will sell for no less than \$30, etc.).

There is all that surplus because people mutually benefit from trading.
• How do we calculate the producer surplus if it is a non-linear curve?
• You use Integration, which Sal teaches in the Calculus playlist.
• Is producer surplus in some cases just basically the producer's profit?
• Not quite. It's not profit (the difference between price and cost), but rather the difference between what the producer actually receives (price) and what they were willing to receive (represented by the point on the supply curve).
• I wonder about the effect of investment (e.g. automation, mass-production) reducing the cost-per-unit at high quantity. Couldn't that result in a downward-sloping supply curve? It would have to be shallow enough that it didn't pay to simply produce more and throw away the excess. But it might slope downward and still intersect a more steeply sloped demand curve. I think the result would be a modest profit, that had little to do with the (negative) producer surplus found by looking at the curve.
• Yes, as a higher quantity supplied is reached, investments could allow for a lower marginal price for additional unit. This would lead to a downward-sloping supply curve, at least over part of the curve.

In some industries (magazine publishing for example) there is always a large up-front fixed development cost, so the very first unit is quite expensive. Marginal costs slope downward from there, but at some point might slope back up a bit at the point where (for example) paper suppliers begin running out of inventory and your raw paper costs go up.

One thing to keep in mind though is that all of these graphs are abstract models that are only relevant in very limited cases. http://mises.org/daily/931 is a nice little article on why one shouldn't take these things too seriously.

• At the very end of the video you said that "we end up by \$6000 of producer surplus PER WEEK" but we have Quantity produced PER YEAR on the horizontal axis. Where this change in is coming from?
• He's just a Sal, Sals make mistakes. His brain was like "year", but his mouth was all like "well, I'm just gonna say week and see what happens".
• Can the supply curve ever be downward sloping? For example, it would seem that in mass produced goods that it's more expensive per car to produce 100 cars then it is to produce 10,000 cars. If the opportunity cost drops as the quantity supplied goes up, would the supply curve be downward sloping?
• Just to clarify: In the above example of the corn farmer we need to assume, that he for some reason doesn't have the possiblity to change his product to for example wheat. Normally one would try to produce the product that grosses the highest amount of money. If for some reason the farmer is forced to stay on his corn he will have to produce more of it in order to still make ends meet.
(1 vote)
• At , the graph is showing what a producer surplus is going to become. The thing I do not understand is that if the producers are selling 1000 lbs of berries for around \$1.00, how are they ending up getting a \$3 profit?
• IF the sellers wish to sell at 1000 lbs, they will get \$1.00 BUT in reality they will sell 4000 lbs because that is where the equilibrium between quantity demanded and quantity supplied lies. Thus, for the first pound that they sell they'll get \$4.00 where its real value is only \$1.00, for the second they'll get let's say \$3.99 when its real value is again only \$1.00 and so on...
Hope this helps.
• can someone explain the difference between consumer surplus and producer surplus? thanks!