Producer surplus is affected by changes in price, the demand and
supply curve, and the price elasticity of supply.
LEARNING OBJECTIVES [ edit ]
Examine producer surplus in terms of changes in demand, supply, price, and price elasticity
Use the aggregate supply curve to explain the level of producer surplus in the market
KEY POINTS [ edit ]
Changes in the equilibrium price are directly related to producer surplus, other things equal. As
the equilibrium price increases, the potential producer surplus increases. As the equilibrium price
decreases, producer surplus decreases.
Shifts in the demand curve are directly related to producer surplus. If demand increases,
producer surplus increases. If demand decreases, producer surplus decreases.
Shifts in the supply curve are directly related to producer surplus. If supply increases, producer
surplus increases. If supply decreases, producer surplus decreases.
Price elasticity of supply is inversely related to producer surplus. If supply is completely elastic, it
is drawn as a horizontal line, and producer surplus is zero. If supply is completely inelastic, it is
shown as a vertical line, and producer surplus is infinite.
TERMS [ edit ]
price elasticity of supply
A numerical measure of the responsiveness of the quantity supplied of a product to a change in
the price of the product alone.
producer surplus
The amount that producers benefit by selling at a market price that is higher than the lowest price
at which they would be willing to sell.
Give us feedback on this content: FULL TEXT [edit ]
Producer surplus is affected by many
different factors. Changes in the price
level, the demand andsupply curves, and
price elasticity all influence the total
amount of producer surplus, other things
held constant.
Changes in Price
Changes in price are directly associated
with the amount of surplus a producer will
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receive. Graphically, the producer surplus
is directly above the supply curve, but below the price. Other things equal, as equilibrium
price increases, the amount of potential producer surplus and the number of goods supplied
increases . Lower prices result in lower potential producer surplus and goods supplied: with a
lower equilibrium price, the producer surplus triangle will be smaller.
Price
Market price
Supply curve
Consumer
surplus
Equilibrium
Producer
surplus
Demand
curve
Equilibrium quantity
Quantity
Economic Surplus
The producer surplus is directly above the supply curve and is shaded in blue.
Demand Curve
Shifts in the demand curve are directly related to the amount of producer surplus. If demand
decreases, and the demand curve shifts to the left, producer surplus decreases. Conversely, if
demand increases, and the demand curve shifts to the right, producer surplus increases.
At an initial demand represented by the "Demand (1)" curve, producer surplus is the blue
triangle made of P1, A, and B. When demand increases, represented by the "Demand (2)"
curve, producer surplus is the larger gray triangle made of P2, A, and C .
Producer Surplus and the Demand Curve
If the demand curve shifts out, producer surplus increases, as seen by size of the gray triangle.
Supply Curve
Similarly, shifts in the supply curve are also directly related to the amount of potential
surplus. Decreases in the supply curve will cause decreases in producer surplus. Increases in
the supply curve will cause increases in producer surplus.
At an initial supply represented by the "Supply (1)" curve, producer surplus is the blue
triangle made of P1, A, and C. If supply increases, represented by the "Supply (2)" curve,
producer surplus is the larger gray triangle made of P2, B, and D .
Price Elasticity of Supply
Price elasticity of supply is the relationship between price and quantity changes. It measures
how quantity supplied is affected by changes in price. When supply is elastic, producers can
increase production without much price or cost change. When supply is inelastic, producers
cannot change production easily.
When supply is perfectly elastic, it is depicted as a horizontal line. Producer surplus is zero
because the price is not flexible. Producers cannot provide a higher price than market price.
When supply is perfectly inelastic, it is depicted as a vertical line. Producer surplus is infinite
because the price is completely flexible.