Producer surplus (PS) is defined as the difference between the actual amount a producer receives (market price) by selling a given quantity of a commodity and the minimum amount that he expects to receive for the same quantity of a commodity (indicated by the marginal cost of production) to cover the cost of production.
In other words, it is the excess of money receipts of a producer over the minimum supply price at which he is willing to sell rather than forgo the sale. It is given by area above the supply curve and below the market price just as the consumer surplus (CS) is measured by the area below the consumer demand curve and above the market price.
As per definition,
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Producer Surplus = Revenue – Variable Cost
Profit = Revenue – (Fixed Cost + Variable Cost) = Producer Surplus – Fixed Cost
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In the short run, since fixed cost is positive, producer surplus exceeds profit. But, in the long run, when fixed cost vanishes, producer surplus equals profit.
Producer Surplus for a Firm:
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Fig 10.14 illustrates producer surplus for a firm in the competitive industry. Here, the profit maximising point is ‘E’ where price equals marginal cost. The profit maximising output is OQ, sold at OP price. The producer surplus is shown by the shaded area in the figure, i.e., area above the supply (MC) curve and below firm’s demand curve till profit maximising level of output OQ. It is equal to the difference between revenue OPEQ and variable cost OABQ.
Producer Surplus for a Market:
Producer surplus for a market is obtained by summing up the producer surplus of all the firms as shown in Fig. 10.15 by the shaded area. Here, higher cost firms have less producer surplus and lower cost firms have more. When price falls below the minimum of the most efficient firm (the one having the lowest minimum of AVC), no output will be supplied in the market.
