Defining Producer Surplus

Producer surplus is the difference between what price producers are willing and able to supply a good for and what price they actually receive from consumers. It is the extra money, benefit, and/or utility producers get from selling a product at a price that is higher than their minimum accepted price, as shown by the supply curve.

Economic Surplus

Producer surplus is the shaded area directly above the supply curve, up to the equilibrium point. Consumer surplus is the shaded area directly under the demand curve, up to the equilibrium point.

For example, above, the equilibrium price is $P'$. However, at $P_1$, the producers are willing to sell one unit of a commodity for a price that is lower than $P'$. The resulting rectangle from $P_1$ on the $y$-axis, to its intersection with the supply curve, up to the level of $P'$ is the producer surplus at price level $P_1$.

Similarly, at $P_2$, the producers are willing to sell two units of a commodity at a price that is still lower than $P'$. The rectangle from $P_2$ on the $y$-axis, to its intersection with the supply curve, up to the level of $P'$ is the new producer surplus at price $P_2$. The total producer surplus at $P_2$ is the first rectangle at the $P_1$ price, plus the new rectangle from the $P_2$ price.

This process is repeated for every price level up to the equilibrium price. To find the resulting total producer surplus, all of the rectangles for the individual price levels are added together, and the total area is the total producer surplus. Below, the total producer surplus is made of all three pink rectangles - the surpluses at price levels of $P_1$, $P_2$, and $P_3$ - added together.

Producer surplus

In the figure, producer surplus at different prices is represented by the pink rectangles.