Eco 6.3 producer surplus

Producer surplus

the difference between the price at which producers are willing to sell a good/service (minimum acceptable price) and the price they actually receive/sell (market price)

What does the supply curve showing producer surplus represent?

the benefit or extra value producers gain from selling at a higher price than their minimum willingness to accept

How to calculate producer surplus

Calculate the area of the triangle (the line at the price shows the market price, it intersects with supply curve making a triangle); ½ x b x h

Total market surplus

The combined benefit that both consumers and producers receive from participating in a market, maximised at market equilibrium

How to calculate market surplus

Consumer + producer surplus

Market equilibrium

A state where the supply and demand for a given good/service are in balance

Market mechanism

when prices change in a free market to balance supply and demand; prices fall during surplus, rise during shortage

Market surplus

When quantity supplied is more than quantity demanded

Market shortage

When quantity supplied is less than quantity demanded

How do you solve equilibrium point?

Set the equations equal to each other to find p, then substitute that number in either equations to find quantity

Marginal

one more

Marginal cost (MC)

price of doing/making 1 more

Marginal benefit

value created by doing/making 1 more

MB > MC

do the thing

MB < MC

don’t do the thing

Profit

revenue (selling price) - costs

How to calculate MC

Difference between total cost of one more and the product before

How do you know if something is marginal thinking?

If the decision is made on the next item, not the past