Producer Surplus

Definition

Producer surplus refers to the difference between the price at which producers are willing to sell a good or service and the actual price they receive. It represents the extra profit that producers make when they can sell their products at a higher price than what they were willing to accept.

Analogy

Imagine you're selling homemade cookies at a school bake sale. You initially set your price at $2 per cookie, but people are so eager to buy them that they end up paying $3 each. The extra $1 per cookie is your producer surplus, representing the additional profit you made from selling them for more than you expected.

Related terms

Consumer Surplus: The difference between the maximum price consumers are willing to pay for a good or service and the actual market price.

Equilibrium Price: The market price where quantity demanded equals quantity supplied.

Deadweight Loss: The loss of economic efficiency that occurs when equilibrium is not achieved, resulting in either a shortage or surplus in the market.