What’s it: Producer surplus is the difference between the market price (equilibrium price) and the price at which a producer is willing and able to sell its product (marginal costs). Another definition is the difference between the actual price of a product and the lowest price a producer is willing to accept to produce it.
For example, to produce an item, a producer bears the cost of Rp4. After calculating the profit markup, the company is willing to sell at least IDR 6. Apparently, the market price for the product is Rp. Therefore, the surplus obtained by producers is IDR 2 (IDR 8-IDR 6).
In a graph, the triangle area above the supply curve and below the equilibrium price represents the total surplus received by producers. We can calculate it with the formula:
- Producer surplus = (1/2) x Qe x (Pe-Pmin)
The surplus measures the net benefit received by producers when they participate in the free market. And, please note, the surplus is not the same as profit.
Coupled with a consumer surplus, it is equal to economic surplus, which refers to the benefit that consumers and producers get when they trade in the free market.