Calculation of producer surplus
Producer surplus is usually expressed by the area below the market price line and above the supply curve. In Figure 1, the shaded areas below the price line and above the supply curve between production zero and maximum output Q1 indicate producer surplus. Among them, OP1EQ1 below the price line. This indicates that the total revenue is the minimum total payment actually accepted by the manufacturer. The area OPMEQ1 below the S curve is the minimum total revenue that the manufacturer is willing to accept. In Figure 1, the area enclosed by the market price line, the manufacturer's supply line, and the coordinate axis is the producer surplus. Because the rectangle OP1EQ1 is the total revenue actually obtained by the manufacturer, that is, A + B, and the trapezoid OPMEQ. The minimum total profit that the manufacturer is willing to accept, that is, B, so A is the producer surplus.
Obviously, the manufacturer produces and sells a certain quantity of Q1 goods at the market price P1. The manufacturer has reduced the quantity of goods for Q1, which means that the manufacturer has increased the production factors or production costs equivalent to the amount of AVC·Q1. However, at the same time, the manufacturer actually obtains a total income equivalent to the total market price P1·Q1. Since AVC is always smaller than P1, from the production and sales of goods in Q1, manufacturers not only get sales revenue equivalent to variable costs, but also get additional revenue. This part of the excess income reflects the increase in the benefits obtained by the manufacturers through market exchange. Therefore, in economics, producer surplus is usually used to measure producer welfare and is an important part of social welfare.
Producer surplus is usually used to measure the economic welfare obtained by the manufacturer in the market supply. When the supply price is constant, the producer welfare depends on the market price. If the manufacturer can sell the product at the highest price, the welfare is the greatest. As part of social welfare, the size of the producer surplus depends on many factors. Generally speaking, when other factors remain constant, an increase in market price will increase producer surplus, and a decrease in supply price or marginal cost will also increase producer surplus. If there is a surplus of goods, that is, people can only sell part of the goods at market prices, and producer surplus will decrease.
Obviously, the sum of the producer surplus of all manufacturers in the market constitutes the producer surplus of the entire market. Graphically, it should be expressed as the area enclosed by the market supply curve, the market price line and the coordinate axis.
