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ALLOCATION: The process of distributing resources for the production of goods and services, and of distributing goods and services for consumption by households. This process of allocation is essential to an economy's effort to address the problem of scarcity. An allocation is efficient if the resources, goods, and services are distributed according to the economy's highest valued uses.

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PRODUCER SURPLUS:

The revenue that producers obtain from a good over and above the price paid. This is the difference between the minimum supply price that sellers are willing to accept and the price that they actually receive. A related notion from the demand side of the market is consumer surplus.
Producers' surplus is the extra revenue received when selling a good. The supply price is less than the price actually received. Most producers under most circumstances receive some surplus of revenue. Even competitive markets overflowing with efficiency generate an ample amount of producer surplus.

Suppose, for example, that the Hot Momma Fudge Bananarama Ice Cream Shoppe is willing and able to accept $1 for a Hot Momma Fudge Bananarama Ice Cream Sundae. This is its supply price. This is what it needs to receive to cover production cost. However, the going market price, the actual price that everyone pays for a Hot Momma Fudge Bananarama Ice Cream Sundae is $2. While Hot Momma Fudge is willing and able to accept $1, it receives $2. It receives a $1 producer surplus on this sale.

A Visual Representation

The supply curve for Yellow Tarantulas, a cute and cuddly creature from the Wacky Willy Stuffed Amigos line of collectibles, presented in this exhibit can be used to illustrate producer surplus.

Producers' Surplus

The supply price of Yellow Tarantulas is measured on the vertical axis and the quantity supplied is measured on the horizontal axis. The positively-sloped supply curve captures the law of supply relation between these two variables. Key to this discussion, the supply price represents the minimum price that sellers are willing and able to accept. However, they often end up receiving more.

For example, if the quantity supplied is 200 Yellow Tarantulas, then the supply price is $15. However, if the quantity supplied is 800 Yellow Tarantulas, then the supply price is $45.

Now suppose that the going market price of Yellow Tarantulas is $30. If so, sellers are willing and able to sell 500 Yellow Tarantulas. Click the [Going Price] button to highlight this situation. However, while the supply price for the 500th Yellow Tarantula is $30, the supply prices for the other 499 Yellow Tarantulas are less than $30. For example, the seller who sells the 300th Yellow Tarantula is willing and able to accept $20.

Yet, because the market price is $30, the 300th Yellow Tarantula sells for $10 more than the minimum supply price that the sellers is willing to accept. The difference between the supply price and the price paid is producer surplus. This particular seller gains $10 worth of producer surplus. In fact, every Yellow Tarantula sold up to the 500th generates producer surplus for the seller. The 500th Yellow Tarantula is the only one with a match between supply price and price received, and no producer surplus.

The total producer surplus associated with a $30 price can be revealed by clicking the [Producers' Surplus] button in the exhibit. The yellow triangle above the supply curve, but below the $30 price, is the producer surplus.

The size of this producer surplus triangle--while probably evident, but worth stating and demonstrating explicitly--depends on the price of the good. A higher price results in a larger producers's surplus and a lower price generates a smaller producer surplus. A click of the [Higher] and [Lower] buttons reveals these alternatives.

Consumers' Surplus

A comparable surplus from the demand side of the market is consumer surplus. It too exists in efficient, competitive markets. As a matter of fact, an efficient market is one that generates the maximum total amount of consumers' and producer surpluses. A market that falls short of the maximum is NOT efficient.

<= PRODUCER PRICE INDEXPRODUCT =>


Recommended Citation:

PRODUCER SURPLUS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2015. [Accessed: August 1, 2015].


Check Out These Related Terms...

     | law of supply | supply schedule | supply curve | supply space | supply determinants | change in supply | change in quantity supplied | consumer surplus |


Or For A Little Background...

     | supply | supply price | quantity supplied | efficiency | competitive market | market | quantity | price | unlimited wants and needs | economic analysis | scarcity | good | service | production |


And For Further Study...

     | market supply | competition | consumer sovereignty | exchange | second estate |


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