The Producer Surplus Flashcards
What does the supply curve indicate?
The supply curve represents the marginal cost to a firm of producing the product
As such, it indicates the minimum price that firms are willing to accept for a product that they have produced
What is the producer surplus, and how can it be calculated?
The producer surplus occurs when the amount received is greater than the business was willing to sell for
Producer Surplus = Amount Received – cost to sellers
How can the producer surplus be represented graphically?
Graphically, the PS is the area above the supply curve (marginal cost curve) and below the price
How does the producer surplus respond to a decrease in the price of a product?
A decrease in the price received leads to a decrease in the quantity supplied by firms
This leads to a decrease in producer surplus because:
The lower price means that for those units the producer does sell, they receive less consumer surplus = PRICE EFFECT
The lower price also means the amount offered for sale is reduced, and because the firm is selling less, they receive less consumer surplus = QUANTITY EFFECT
How does the producer surplus respond to an increase in price?
An increase in price leads to an increase in the quantity supplied by firms
This leads to an increase in producer surplus because:
The higher price means that for those units the producer does sell, they receive more producer surplus
The higher price also means the amount offered for sale is increased, and because the firm is selling more, they receive more producer surplus
How can you calculate the area of a producer surplus?
Base times height divided by two
