Welfare Economics Part II Chapter 7: Producer Surplus

PRODUCER SURPLUS Supply Curve = marginal cost curve (MC) Marginal cost = cost of producing one more unit Producer Surplus = Price Received minus the seller’s MC Measure the benefit to sellers in a market

Consumer & Producer Surplus Review Price E1 CS = MB – Price Paid Consumer Surplus D = MB S = MC @ E1 MB = MC Total Surplus is maximized P1 Q1 Producer Surplus PS = Price Received - MC Quantity

Rising Prices & Producer Surplus Additional producer surplus to initial producers Supply = MC As Price Producer Surplus D E F P2 Q2 Producer surplus to new producers B P1 C Initial producer surplus A Q1 Quantity

EFFICIENCY vs. EQUITY Efficiency = an allocation which maximizes the Total Surplus Total Surplus = Consumer Surplus + Producer Surplus Equity = the fairness of the distribution of well-being among the various buyers and sellers Equity is not addressed in free markets Market equilibrium quantity maximizes *Total Welfare * assuming no market failures such as externalities, price collusion, fraud, etc….

Practice Test Producer Surplus & Total Welfare