9.2 Producer Surplus

Economists measure a firm’s gain from participating in the market by its producer surplus (PS), which is the excess of the revenue from selling a good and the minimum amount necessary for the seller to be willing to produce the good. The minimum amount that a seller must receive to be willing to produce is the firm’s avoidable production cost, which is usually its variable cost (Chapter 8). Producer surplus is analogous to the consumer surplus measure that we analyzed in Chapter 5.

Measuring Producer Surplus Using a Supply Curve

To determine a competitive firm’s producer surplus, we use its supply curve: its marginal cost curve above its minimum average variable cost (Chapter 8). The firm’s supply curve in panel a of Figure ...

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