Introduction

According to the following supply curve, at a price of R4, producers are willing and able to supply 300 pieces of fried chicken. What it also indicates is that for up to 300 pieces, producers are paid more for a piece of fried chicken than they are willing to accept for it. A point such as K indicates that while suppliers are willing to accept R2 but are paid R4, giving them a surplus of R2 per unit. At a point such as L, they are willing to accept R1 but are paid R4, giving them a surplus of R3. And at a point such as M, they are willing to accept R3 but are paid R4, giving them a surplus of R1 per unit.

Using the supply curve, total producer surplus at a market price of R4 can therefore be represented by the triangular area (0-4-E) between the supply curve, which indicates the minimum prices suppliers are prepared to accept, and the horizontal line (which indicates the market price of R4) that they are actually receiving.

Activity

Do the following activity to see if you have grasped the concept of total producer surplus:

Which one of the following best describes producer surplus?





Think again. What the producer is willing to accept is also important.

Correct.

The producer surplus can be defined as the difference between the price the producer is willing to accept and the price the consumer is actually paying.

Think again.

Included in the price the producer is willing to accept is the profit. Producer surplus is more than profit only.

Think again.  It is about what the producer is willing to accepts.

Use the following diagram to identify the total producer surplus at…

  • R10
  • R15
Click to see the answer

a. It is 0-10-K. The producer surplus is the area between the supply curve, which indicates the minimum prices sellers are prepared to accept, and the horizontal line, which indicates the market price.

b. It is 0-15-L. The producer surplus is the area between the supply curve, which indicates the minimum prices sellers are prepared to accept, and the horizontal line, which indicates the market price.