Producer Surplus

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Producer Surplus

Producer surplus is a term that is found in both economics and mathematics. This was minted  primarily by Alfred Marshallan influential and popular economists of that time. Before you are more concerned with how to calculate producer surplus, you should first of all clarify what the producer surplus is.

Definition and meaning

Basically, said the producer surplus is a difference between the sales price achieved in the market and the cost of production (ie the costs incurred in the production of the respective good). For this reason, the most important core statement of the surplus of producers is that it identifies the profits (= revenues – costs) of the companies in a market.The producer surplus is therefore something positive for the manufacturers.

Intentions of the enterprises

Understandably, every entrepreneur is interested in a maximum profit. However, depending on various factors such as demand and production costs, an entrepreneur may have to be satisfied with a lower profit.

It is important that the producer in any case the reservation price (= the price that must be achieved at least so that it is ready for sale) is achieved. The concept of marginal costs is equal.

If the reservation price reached exactly, so no producer surplus has been generated. If lower revenues are achieved than this price, this can threaten the existence of a company in the long term. If higher revenues achieved as the reservation price, is the producer surplus, ie an additional profit for the entrepreneur.

Counterpart of the producers’ rents

The counterpart of the producer surplus is the so-called consumer surplus . This is the main benefit for consumers, because they get a cheaper product for which they would be willing to pay the price x. They give less than they thought or wanted.

There are several similarities between producer and consumer rivals:

  • Both pensions bring a financial advantage to consumers or manufacturers
  • Both pensions are measured in units of gels (GE)
  • The goal of each market participant is to achieve such a pension

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