Producer's Surplus Producer's Surplus
Hamro Library
Hamro Library

Producer's Surplus

The access amount that a producer or a seller receives from the sale of output over its cost of production is known as producer's surplus. More precisely, producer's surplus is the measure of the benefit that a producer derives from the sale of output. It is calculated by finding the area below the price of the output and above the supply curve.

According to N.G. Mankiw, "Producer's surplus is the amount a seller is paid minus the cost of production. It measures the benefit sellers receive from participating in a market."

In short, a Producer's surplus is the amount received by a seller less the cost of the seller.

P.S = R - C.S

P.S = Producer's Surplus
R = Revenue or amount received by the seller
C.S = Cost of Seller

The concept of the Producer's surplus can also be explained with the help of the following diagram:

In the figure above, price and quantity are represented in the Y-axis and the X-axis respectively. The upward-sloping SS curve represents the supply curve. It shows that at OP price the producer's surplus is equal to the area of triangle PSA.

Producer's surplus = Area of Δ PSA
= (1/2) x Base x Height
= (1/2) x PA x PS
= (1/2) x OQ x PS        [∵ PA = OQ]

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