Producer Surplus

Producer surplus (PS) measures the benefit producers receive from selling a good at a price higher than their minimum willingness to accept (their marginal cost). Graphically, it’s the area above the supply curve and below the market price, up to the equilibrium quantity. The supply curve reflects cost; the price is revenue. The difference is the producer’s gain. Watch the triangle take shape in the graph below.

Now that you can see the triangle, the math is short. The PS region is a right triangle with base $Q^{\ast }$ (the quantity sold) and height $P^{\ast }-P_{\min }$ (the distance from the market price down to the lowest marginal cost). Area = $\frac{1}{2}\times$ base $\times$ height.

Producer surplus is NOT the same as profit. $PS$ is revenue minus variable costs (the area under the supply/$MC$ curve). Profit is revenue minus total costs (variable + fixed). $PS=\text{Profit}+\text{Fixed Costs}$. In the short run, $PS$ can be positive even when profit is negative, because $PS$ doesn’t subtract fixed costs.

Total surplus ($TS$) $=CS+PS$ — the entire area between the demand and supply curves up to $Q^{\ast }$. The competitive equilibrium maximizes total surplus. Any policy that moves quantity away from $Q^{\ast }$ creates deadweight loss ($DWL$) — surplus that simply disappears. We’ll see this in action with price controls and taxes next.