Glossary

Producer Surplus

When a seller gets paid more than the minimum they would have accepted, they keep the difference as a bonus. That bonus is called producer surplus. Say you are willing to mow a neighbor's lawn for as little as $20, but they hand you$ 35. You do the same job either way, but you walk away with $15 more than you required — that$ 15 is your producer surplus.

Formally, producer surplus is the difference between the price a seller receives and their marginal cost — the cost of producing one additional unit — summed over every unit sold. Because the supply curve is built from marginal costs stacked lowest to highest, producer surplus appears on a diagram as the area above the supply curve and below the market price line, from zero to the quantity traded $Q^*$ . When the supply curve is a straight line, that area is a triangle. Producer surplus is the mirror image of consumer surplus: one captures the gain to buyers, the other the gain to sellers. Together they make up total surplus, the standard measure of market welfare covered in AP Microeconomics Unit 2, IB Economics 1.4, and the welfare section of the supply and demand model.

PS = \tfrac{1}{2} \times Q^* \times (P^* - P_{\min})

Producer surplus (linear supply)

For a linear supply curve, producer surplus is the area of a triangle — half the base times the height.

P_{\min}

is the lowest price at which any seller will supply (the point where the supply curve meets the price axis);

Q^*

is the equilibrium quantity traded;

P^*

is the market price.

Marginal cost: The cost of producing one more unit; the supply curve is built by ranking sellers from the lowest marginal cost to the highest. See marginal cost.
Consumer surplus: The buyer-side mirror of producer surplus — the area above the market price line and below the demand curve, representing the bonus buyers keep when the price falls below their willingness to pay. See consumer surplus.
Total surplus: $CS + PS$ , the combined gain to buyers and sellers from all trades in a market. A competitive equilibrium maximises total surplus; any distortion that moves output away from $Q^*$ reduces it.
Deadweight loss: The portion of potential total surplus destroyed when output falls below — or is forced above — the competitive equilibrium quantity. See deadweight loss.