1. Welfare Economics Part II
Chapter 7: Producer Surplus

2. 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

3. 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

4. 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

5. 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….

6. Practice Test
Producer Surplus & Total Welfare