Supply Curve and Producer Surplus

Overview

The lecture explains the concept of the supply curve, opportunity cost, and introduces producer surplus by analyzing a berry market example.

The supply curve shows the minimum price producers need to supply each quantity.
Producers require at least the opportunity cost to supply goods, which is the value of the next best alternative use of their resources.
As more output is required, less suitable resources are used, increasing the opportunity cost for additional units.
The supply curve can be seen as the producers’ opportunity cost curve.

Producer surplus is the difference between what producers are paid and their opportunity cost.
At the market price, only the last unit produced has an opportunity cost equal to the price; earlier units have lower opportunity costs.
Producer surplus is represented by the area above the supply curve and below the market price on a price-quantity graph.
With a linear supply curve, producer surplus forms a triangle under the market price and above the supply curve.

Example: Market price is $4 per pound, quantity is 4,000 pounds.
The minimum supply curve price starts at $1 per pound for the first 1,000 pounds.
Producer surplus = area of triangle: (market price – minimum price) × quantity ÷ 2.
In the example: (4 – 1) × 4,000 ÷ 2 = $6,000 producer surplus per week.

Supply Curve — a graph showing the minimum price at which each quantity will be supplied.
Opportunity Cost — the value of the next best alternative forgone when making a choice.
Producer Surplus — the amount producers receive above their opportunity cost, shown as the area above the supply curve and below the market price.

Practice calculating producer surplus from supply curves.
Review the relationship between consumer surplus, producer surplus, and market equilibrium.