Producer Surplus Ap Micro 9/6/17

Producer Surplus Cost: The lowest price a seller is willing to sell something Producer Surplus: benefits that sellers receive, or the difference between the lowest price willing to sell for vs. ACTUAL selling price Example: selling used textbooks Potential sellers Seller’s cost Andrew $5 Betty $15 Carlos $25 Donna $35 Engelbert $45

Suppose price of book = $30 Andrew’s net gain as a seller: $30-$5 = $25 (individual producer surplus) Betty: $30-$15 = $15 Carlos: $30-$25 = $5 Total producer surplus = $25+15+5 = $45 B. Suppose books are now $40. Calculate the total producer surplus.

Graphing Producer Surplus Producer Surplus is the area located under the equilibrium price but above the supply curve Since this creates a triangle we could find the area using the formula for a triangle (A=1/2b*h )

B. Suppose books are now $40. Calculate the total producer surplus. Potential sellers Seller’s cost Indiv. Surplus Andrew $5 40-5= 35 Betty $15 15-5= 10 Carlos $25 25-5= 20 Donna $35 35-5= 30 Engelbert $45 45-5= 40 Total producer surplus: 35+10+20+30+40= $135

Graphing Producer Surplus When looking at a graph that includes demand and supply, producer surplus is still the area located below the equilibrium price and above supply.

Changing Prices and Producer Surplus A fall in price results in a decrease in producer surplus. This is because the area above the supply curve gets smaller An increase in price results in a increase in producer surplus This is because the area above the supply curve gets larger

Gains From Trade Total surplus: sum of producer and consumer surplus (orange area + green area) When a market is efficient, both the consumer and producer experience surplus— this is why trade is good

Why Market Equilibrium = Max Total Surplus 1. Those that value product most will get it (they have the highest willingness to pay) 2. Those who most value the right to sell product will sell it (they have lowest cost) 3. Every consumer values the product more than seller – mutually beneficial transactions 4. Every potential buyer who doesn’t buy values the good less than the seller – no mutually beneficial transactions are missed *This does not mean that every single person is happy If government intervenes > less efficiency > decrease in total surplus