The producer’s surplus is the difference between the income of a producer earned by selling his product in the market and the cost he incurs in producing the product.
That means the producer’s surplus is the surplus income out of his production cost.
In other words, a producer’s surplus is the difference between the actual price he earns and the expected price he determines considering his production cost is termed as the producer’s surplus.
We know that the summation of marginal revenue is the total revenue. In a perfect market, products are sold or purchased at a particular price.
For this, marginal revenue remains the same. On the other hand, the summation of marginal cost is the total cost. With the increase in production, the marginal cost increases.
Now how to measure a producer’s surplus is shown below:
| Units | Price (Taka) | Marginal RevenuefTk.) | Marginal cost (Tk.) | Producers Surplus(Tk.) |
| 1st | 10.00 | 10.00 | 5.00 | 5.00 |
| 2nd | 10.00 | 10.00 | 7.00 | 3.00 |
| 3rd | 10.00 | 10.00 | 10.00 | 0.00 |
| Total revenue | Total cost | Tk.8.00 | ||
| =Tk.30 | = Tk.22.00 |
In the above schedule, we observe that the price of the good is $10.00 per unit (fixed).
Therefore, marginal revenue is unchangeable.
Summing up the marginal revenues of different units the total revenue is Tk.30.00.0n the other hand summing up the cost of different units the total cost is Tk.22.00
Therefore, the producer’s surplus= Total revenue – Total cost
= 30.00-22.00
= 8.00
The producer’s surplus can be shown in the following graph
Quantity of product
The OX axis indicates the quantity of output and the OY axis indicates revenue and cost of production.
P=AR=MR curve indicates the demand and revenue. S=MC indicates the direction of supply and cost.
According to the graph the total cost for producing the OQ amount of the commodity, OQEG is the total cost. On the other hand, the revenue earned by selling the OQ amount of goods is OQEF.
Therefore, the producer’s surplus = total revenue-total cost
=OQEF – OQEG = EFG