2.5.2—Producer surplus

Producer surplus is the extra return sellers receive when the market price exceeds the minimum price at which they would supply each unit. On a supply diagram it is the area above supply and below price up to the quantity traded.

A price rise usually increases producer surplus through a gain on existing units and payment for additional units. Costs and supply elasticity affect the size of the change.

If a firm would supply a unit for £4 and sells it for £7, its surplus on that unit is £3.

Producer surplus is not total profit or revenue: it ignores fixed costs and other business expenses.