Introduction to Producer Surplus
Producer surplus is the difference between the amount at which a producer is willing to sell the goods and the actual amount at which the goods are sold when he makes the final trade. This difference represents the benefits gained by the producer by selling the goods at the market price.
When combined with the consumer surplus, both the producer surplus and consumer surplus represent the overall benefits received by everyone in the market right from the production and the trade of the goods.
What is Producer Surplus?
Producer surplus is the amount gained by the producer by producing and selling the goods. It is the difference between the amount at which the producer is willing to supply the goods and the actual amount which the producer receives on making the trade at the market price. Producer surplus can be calculated by subtracting the cost of production from the cost at which the goods are sold.
The goal of the producer always is to gain more producer surplus by selling their goods at a higher price. But, if the prices of goods are increased frequently it may lead to the loss in demand of such goods. Hence, the producers need to keep this in mind while trying to gain more producer surplus.
To know the overall economic surplus of the market, the producer surplus is combined with the consumer surplus which tells the benefits gained by both producers and consumers in the market. If the producer is smart enough in the pricing of the goods and sells the goods at the highest price that the consumer is willing to pay, the producer can get the overall surplus in the market. But this is not ideally possible, so both the producer surplus and consumer surplus have an effect on the market prices and form an important part of the overall economic surplus.
