# Meaning of Producer Surplus

After you have worked through this section of the learning unit, you should be able to:

• describe producer surplus and illustrate using a diagram total producer surplus

We have seen that supply gives us an indication of the quantities of a good or service that suppliers are willing and able to supply. We have also argued that suppliers will not be willing to supply a good or service if they cannot cover the cost of the good or service and make a profit.

### Assuming that the price of a piece of fried chicken is R4, consider the position at point K in the following diagram:

At point K, what price are sellers willing to accept for a piece of fried chicken?

Think again.

While the market price is R4 they are willing to accept a lower price.

Think again.

While the market price is R4 they are willing to accept a lower price.

Correct.

At point K, they are willing to accept R2 for a piece of fried chicken, as indicated by the supply curve.

### Given that the market price is R4, how much would the supplier obtain for a piece of fried chicken at point K?

Think again.

The market price is R4.

Think again.

The market price is R4.

Correct.

At point K, they would obtain the market price of R4 for a piece of fried chicken.

### What is the difference between what suppliers receive for a piece of fried chicken at point K and what they are willing to accept for it?

Think again.

They receive R4 but are willing to supply at R2.

Correct.

The difference between what they receive (R4) and what they are willing to accept (R2) is R2 (R4 – R2), which is the producer surplus per unit at point K.

Think again.

They receive R4 but are willing to supply at R2.

This difference between what suppliers are willing to accept and what they actually receive is the producer surplus. We can now formally define producer surplus as the difference between the amount the producer receives and the minimum amount the producer is willing to accept.

In the above diagram, at point K, the minimum amount is R2 and the producer receives R4. The producer surplus is therefore R2 per unit.

With the producer surplus defined as the difference between the amount the producer receives and the minimum amount the producer is willing to accept, we can now continue identifying the total producer surplus.

#### Activity

Do the following activity to see if you have grasped the concept of producer surplus:

### Assume you are an ice cream seller and you are willing to accept R10 for an ice cream and the market price is R17.

1. What is the minimum price you are willing to accept for the ice cream?
R______
2. What is the price you receive for the ice cream?
R______
3. What is your producer surplus on the ice cream?
R______
1. R10. The minimum price you are prepared to accept is R10.
2. R17. Since the market price is R17, this is the price you receive.
3. R7. Your producer surplus is R7 which is the difference between the market price of R17 and the minimum price of R10 you are prepared to accept.

### If for some reason the minimum price you are willing to accept for an ice cream increases from R10 to R12, while the market price is R17, what happens to your producer surplus?

My producer surplus ______

Correct.

Your producer surplus decreases from R7 (R17 – R10)  to R5 (R17 –R12).

Think again.

The market price is the same but the price at which you are willing to supply has increased.

Think again.

The market price is the same but the price at which you are willing to supply has increased.

### The following graph indicates the market supply for ice cream:

1. If the market price is R15, what is the producer surplus per unit for a quantity of 200?
2. If the market price is R20, what is the producer surplus per unit for a quantity of 200?

a. The price the producer is willing to sell it for is R10. The surplus is therefore R15 – R10 = R5.

b. The price the producer is willing to sell it for is R10. The surplus is therefore R20 – R10 = R10.