How A HIGHER PRICE RAISES PRODUCER SURPLUS
You will not be surprised to hear that sellers always want to receive a higher price for the goods they sell But how much does sellers’ well-being rise in response to a higher price? The concept of producer surplus offers a precise answer to this question Figure 6 shows a typical upward-sloping supply curve’ that would arise in a market with many sellers Although this supply curve differs in shape from the previous figure, we measure producer surplus in the same way Producer surplus is the area below the price and above the supply curve. In panel (a), the price is P I and’ producer surplus is the area of triangle ABC. (b) shows what happens when the price rises from PI to P2. Producer surplus now equals area ADF.
This increase in producer surplus has two parts. first, those sellers who were already selling QI of the good at the lower price PI are better off because they now get more for what they sell. The increase in producer
surplus for existing sellers equals the area of the rectangle BCEn. Second, some new sellers enter the market because they are now willing to produce the good at the higher price, resulting in an increase in the quantity supplied from QI to Q2. The produce. surplus of these newcomers is the area of the triangle CEF As this analysis shows, we use producer surplus to measure the well-being of sellers in much .the same way as we use consumer surplus to measure the well-being of buyers. Because these ‘two measures of economic welfare are so similar, it is natural to use them together. And indeed, that is exactly what we do in the next section.
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