However, the higher price means consumers reduce their quantity demanded and want to buy at Q3. But, producers may see the opportunity to sell more products at a higher price and produce at Q2. 4 - Producer surplus with a price floorĪs Figure 4 shows, the producer surplus increases by the rectangular area marked as A since they can sell at a higher price now. So, what happens to the producer surplus when there is a price floor? Let's have a look at Figure 4.įig. Based on this, there are two ways we can define the producer surplus.Ī price floor is a lower boundary placed on the price of a good by the government. This tells us that the difference between how much producers are willing to sell their products for and how much they actually sell it for is their producer surplus. Therefore, for producers to make a surplus, they must sell their products for a price that is higher than their cost. And producers are willing to sell their products for the cost of making the product at least. Producers incur costs to make the products they sell. This captures the concept of the producer surplus, as it is how much better off producers are when they sell goods. Let's dive right into it and see what the producer surplus is all about! Definition of Producer Surplusįor the definition of producer surplus, we must first understand that producers will only sell a good if the sale makes them better off. However, if you manage to sell your product for a higher than the minimum amount you're willing to accept, the difference becomes your producer surplus. This amount is the minimum amount you're wiling to accept for your product. How does it work? If you had a product for sale, you would have an idea of how much you're willing to sell it for. This is a simplified explanation of the producer surplus, which is the benefit producers get from selling goods in the market. Why would you sell something if there was no benefit in it for you? We can't think of any reason! If you were selling something, then you most likely want to benefit from selling it.
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