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

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