PRODUCER’S
SURPLUS
AND
EQUILIBRIUM
`
CONCEPTS
1.Introduction to Producer’s Surplus
2.Producer’s Benefits
3.Producer’s Equilibrium
(a)Maximizing output subject to a cost
constraint
(b)Minimizing cost subject to an output
constraint
PRODUCER’S SURPLUS
 Market
Supply depicts the various quantities
that suppliers would be willing to sell at
different prices.
 Supply curve can also be viewed as a measure
of the marginal (opportunity) cost to the seller
of supplying various quantities of the good.
 Assumption: The marginal (opportunity) cost of
production increases as market output expands.
 Producer’s marginal cost of production is the
lowest price he/she would accept.
PRODUCER’S SURPLUS
 Producer
Surplus is the amount a seller is paid
minus the cost of production.
 Producer surplus measures the benefit to
sellers of participating in a market.
 A producer might be willing to accept $3
(his/her MC of production) to supply the good
but in fact gets $5 market price.
 In this case, producer gains a surplus of $2.
PS = ($6 x 6) - ($1 +$2 + $3 + $4 + $5 + $6)
= $15
P
S
$6
$5
$4
$3
$2
$1
1
2
3
4
5
6
Q
Total Producer
Benefits (Revenue)
P
S
$6
$5
$4
$3
$2
$1
1
2
3
4
5
6
Q
Producer Surplus =$15
P
S
$6
$5
$4
Producer
Costs
$3
$2
$1
1
2
3
4
5
6
Q
 Producers
try to maximize output with
minimum costs.
 Producers equilibrium can be explained
with the help of two curves:
1.Iso-quant curve
2.Iso-cost curve
 Isoquant
curve shows all possible
combinations of two inputs; labour and
capital that will give the producer same
output level. Output is fixed along a given
isoquant.
 Isocost Line shows all possible
combinations of Labour and Capital that
can be purchased given PL and PK and
limited producer budget (total cost outlay).
 Producer
has to maximize his output
with a given cost structure.
 In this situation,an isoquant map has to
be combined with a single isocost line to
identify the point of equilibrium.
 Higher isoquants indicate higher level of
production.
K
D
k1
E
Is2
Is3
0
L1
Is3
L
 Two
conditions necessary for producer
equilibrium:
1.The iso-cost line is tangent to isoquant
2.Iso-quant is convex to the origin at
the point of equilibrium
Producer
wants to produce the
output with minimum cost.
Hence, there will be a single
isoquant.
This will ensure his equilibrium.
 We
studied producer’s surplus,
producer’s equilibrium in detail.