Producer Surplus
IntermediateProducer surplus is the difference between the price a seller receives for a good and the minimum price at which they would have been willing to sell it. It measures the extra benefit producers gain from selling.
Each producer has a minimum price at which they are willing to sell, usually related to their cost of production. If a farmer would sell tomatoes for as little as 1 per kilogram but the market price is 1.60, they gain 0.60 of producer surplus on each kilogram sold.
Across a whole market, producer surplus adds up these gains for all sellers. On a supply and demand graph, it is the area above the supply curve and below the market price, up to the quantity sold.
Producer surplus is closely linked to profit but is not identical, because it focuses on the gains from each extra sale above the minimum acceptable price rather than total profit after all fixed costs.
When prices rise, producer surplus grows, both for existing sellers and for new ones who enter the market. When prices fall, it shrinks. Consumer surplus and producer surplus together make up total surplus, a measure economists use to judge how much overall benefit a market creates for society.
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