How a Higher Price Raises Producer Surplus

You will not be surprised tp hear that sellers always want to receive a higher price for the goods they sell. But how much does sellers well-being rise in response to a higher price? The concept of producer surplus offers a precise answer to this question.

A typical upword-sloping supply curve that would arise in a market with many sellers. Although this supply curve differs in shape from the previous we measure producer surplus in the same way. Producer surplus in the area below the price and above the supply curve. In the price is and producer surplus is the area of triangle.

What happens when the price rises from to producer surplus now equals area ADF. This increase in producer surplus has two parts. First those sellers who were already selling of the good at the lower price are better off because they now get more what they sell. The increase in producer surplus for existing sellers equals the area of the rectangle BCED. Second some new sellers enter the market because they are now willing to produce the good at the higher price resulting in an increase in the quantity supplied from. The producer surplus of these newcomers is the triangle CEF.

As this analysis shows we use producer surplus to measure the well-being of sellers in much the same way as we use consumer surplus to measure the well-being of buyers. Because these two measures of economic welfare are so similar it is natural to use them together. And indeed that is exactly what we do in the next section.

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