Producer Surplus (PS) is a measure of suppliers's gain as a result of participating in the market. It is the difference between the total revenue suppliers accumulate, from the production and selling of goods, and the minimum about of revenue needed to cover the variable costs of production.
Inputs
Suppose the supply curve of a particular good is represented by the linear equation, Qs = C + Dp, where C represents the intercept of the supply curve, D represents the slope of the supply curve, and p represents the price of the good. For example, if the supply curve for corn can be represented by the linear equation,
Qs = -80 + 10p
and the price of corn is determined to be, p = $15, under the given supply and demand conditions.
The following would be inputted into the equation calculator above to determine the producer surplus for this particular good;
| C | -80 |
|---|---|
| D | 10 |
| p | 15 |
Explanation
In order for suppliers to be willing to produce, the revenue gained from selling must be equal to or greater than that of the variable costs of production. This means that the price point and quantity sold of a particular good must generate enough revenue to cover productions costs, any revenue gained exceeding that of the cost of production is called producer surplus, more commonly know as total profit.
Using the calculator above, you are able to calculate the producer surplus for the above linear supply curve. In inputting the numbers above we get that producer surplus (PS) is equal to $805.
References
Perloff, Jeffrey. Microeconomics. Boston, MA: Pearson Education, 2011. Print.