Producer surplus

1. The supply curve traces the minimum acceptable price for each unit, which reflects that unit's marginal cost.
2. Picture a farmer who would sell a crate of apples for as little as £3, yet the market price is £5; the £5 − £3 = £2 kept on that crate is producer surplus.
3. Because every seller receives the single market price, any unit whose marginal cost is below that price earns the difference, so a higher price feeds through into a larger gain.
4. On a diagram this gain is the area above the supply curve and below the market price, so it can be measured in £ directly.
5. Summed across all sellers, it measures the net benefit, or welfare, that producers draw from taking part in the market.

Reading the diagram

1. Price sits on the vertical axis and quantity on the horizontal axis, so vertical distances represent money values.
2. The height of the supply curve at each unit shows the least a producer would accept for that unit.
3. The gap between the market price and that height is the surplus earned on that unit.
4. Adding this gap across every unit sold gives total producer surplus.

Measuring the area

1. With a straight-line supply curve the surplus is a triangle, so simple geometry gives its size.
2. The bottom of the supply curve shows the lowest price at which any unit is offered.
3. The height of the triangle is the market price − that lowest offer price.
4. The base of the triangle is the quantity actually sold.

Producer surplus (linear supply):

$$PS=\frac{1}{2}\times b\times h$$ $$h=P-P_{min}b=Q$$

What changes it

1. A rise in price raises producer surplus, because firms earn more above their minimum on each unit and are drawn to supply more units.
2. A fall in price lowers it, as the top slice of the triangle is lost and higher-cost units stop being supplied.
3. A fall in costs, say cheaper fuel, shifts supply right and lowers the minimum acceptable price; surplus per unit widens even if price later drifts down, so the net effect depends on how far price falls.

Why it matters

1. It gives economists a £ measure of producer welfare, so the gain or loss from a price change, a tax or a subsidy can be compared directly.
2. Set against consumer surplus, it becomes the yardstick for judging whether a market or policy raises total welfare or destroys it.

Evaluation

1. It gives a clear, visual £ measure of the benefit producers draw from a market.
2. But it is related to profit rather than identical to it, because it does not net off fixed costs such as rent or machinery.
3. So it depends on the cost structure: with heavy fixed costs a large surplus can still mask a loss, so read it as welfare, not as a precise profit figure.