Producer Surplus: Definition, Formula & Example

Producer Surplus: Definition, Formula & Example
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  • 0:03 Producer Surplus
  • 0:56 What Is Producer Surplus?
  • 1:50 Formula
  • 2:22 Practice
  • 3:31 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting
In this lesson, we'll explore the concept of producer surplus. By defining what it means, learning the formula, and looking at examples, we'll gain a better understanding of producer surplus.

Introducing Producer Surplus

Let's imagine for a minute that you specialize in woodworking. Each day you head out to your woodshop where you spend hours perfecting many different items. You build shelves, picture frames, and even novelty cutout animals for kids. After you have made several items, and run out of room to store them in your shop, you head to the local swap meet where you try and sell your creations. Each piece is carefully labeled with a price tag and, should you sell every piece, you can expect to make $400. But what happens if one of your shelves is so beautiful, that multiple people are interested in buying it? What happens if a bidding war begins with each person offering more money just to purchase the shelf? Well, if the price tag states $35 and after a few minutes you accept an offer of $85, you end up making a profit of $50. What you have just experienced is known as a producer surplus.

What Is Producer Surplus?

So what exactly is a producer surplus? Well, producer surplus is the extra profit obtained by a producer when they receive a price for a good that is more than the minimum amount they were willing to accept. This results in a bonus for the producer because the producer is getting more profit than what was actually needed to cover the cost of production. Another way to look at producer surplus, is to consider it as a way we measure the difference between what a producer actually receives for a product and the minimum amount that the producer would be willing to accept for that same product. This creates profit, which we call a surplus, and is the benefit that producer gets for simply selling that good. So, from our earlier example, you were willing to accept the minimum amount of $35 for your shelf, but you received $85 instead. Therefore, the $50 difference is your producer surplus.

Formula

Now, let's take a minute and apply what we've learned in the form of a formula. In our previous example we received a surplus of $50. But what you may be wondering, is how did we obtain that number? The formula is quite simple:

Amount received for product - Minimum price acceptable = Product surplus

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