Cambridge International as and a level Economics Ebook

Producer surplus
In certain respects, 
producer surplus 
is a similar concept 
to consumer surplus. Here, however, we are looking at a 
situation from the producer’s or supplier’s perspective. 
Producers are very keen to supply consumers who are 
willing to pay a price above that which they would 
normally be prepared to accept. A typical example of such 
a situation might be in the case of air fares. Suppose the 
base-line price for a fl ight from Islamabad to London is 
$800. Th
is is what, on average, the airline sees as a fair 
price for such a fl ight and is the minimum it is prepared 
to accept. Th
ere are likely to be some passengers who are 
willing to pay above this price. Th
ese are most likely to be 
those who have not booked in good time before the fl ight 
and who have urgent business in the UK. Such consumers 
will be providing additional revenue to the airline over 
and above the typical fare level. Th
is is what is called 
the producer surplus and is referred to as the diff erence 
between the price a producer is willing to accept and what 
is actually paid.
Producer surplus: 
the diff erence between the price a 
producer is willing to accept and what is actually paid.
KEY TERM
Figure 2.20a
 shows the extent of producer surplus. Th
is 
is shown by the shaded area above the supply curve but 
below the price line at 
P
2
. Anything the fi rm sells below 
price 
P
2
is because it is willing to sell to consumers at that 
price. Th
ere is, however, a point
 P 
on 
Figure 2.20a 
below 
which the producer is unwilling to supply since it would 
not be covering the cost of production.
Figure 2.20b
 shows how producer surplus changes with 
a change in the quantity supplied. Producers only willing 
to produce at quantity 
Q
1 
for a price 
P
1
still receive price 
P
2
. Th
is is their producer surplus, although it is less than 
if they had been willing to increase their quantity supplied 
to 
Q
2
.
Quantity supplied
Producer surplus
Q
2
0
P
P
2
E Market price
(a)
S
New Producer
surplus
Q
2
Q
1
0
P
P
2
P
1
E Market price
(b)
S