in order to survive firms must be profitable or given our zero profit condition be earning no less than zero economic profits remember profits are calculated by taking total revenue and subtracting total cost total revenue is just the money the firm expects to make selling their products but total cost is more than just money they spend producing them the total cost includes both implicit and explicit cost the costs are the direct costs of production well implicit costs are the opportunity costs the value of the best alternative use of the same resources when we include implicit costs earning zero profits isn't a bad thing at all if you're earning enough to cover both your explicit and implicit costs then that is saying you're earning enough money to make all this effort worth it positive economic profits mean we are paying the producer more than they're asking for they're earning money in excess of the minimum amount they need to be willing to do it when we studied consumer Theory we found a similar excess when consumers pay less than what they're willing to pay they end up with a surplus value from the transaction if I'm willing to pay twenty dollars to see a movie but I only have to pay fifteen dollars then I get five dollars worth of happiness for free there's a similar Surplus for producers producer Surplus is the value created through exchange which accrues to the producer it is measured by the area above the supply curve but below the market price this area marks the marginal profit earned from each sale the first unit was produced much more cheaply than the price earned when it was sold which means the producer earned economic profit from the transaction at least on the margin if we add that up for all producers we get their producer Surplus let's dig a Little Deeper the supply curve represents the marginal cost of production and so if we add up all those costs cumulatively for each unit produced we have the total variable cost for all firms it's the variable cost because marginal costs do not include any fixed costs if we want to calculate the total revenue we will take the quantity sold and multiply it by the price that's the same thing we would do if we wanted to find the area of this whole rectangle the base of this rectangle is the quantity produced while the height is the price paid for each unit so price times quantity gives us total revenue if we subtract out the variable cost from total revenue will get producer Surplus this isn't the same thing as profits because to get profits we would need to also subtract out fixed costs but producer Surplus is the profit the firms earn before they pay their fixed costs let's work through an example problem where we need to calculate producer Surplus let's say market supply is given by the function quantity supplied equals 4 times P minus 50. the market price is 25 so let's start by replacing our market price arrow on the graph with 25. we need to find the coordinates of this point here we already know the value for the price so in order to find the quantity we need to plug the price into Supply if we solve for the quantity we get that the quantity supplied at the market price of 25 is 50 units which we can add to our graph next we need to find the y-intercept by plugging in 0 for the quantity supplied and finding the price where the supply curve crosses the y-axis doing the algebra on this one gives us a price of 12.5 what this means is that if the price were below 12.50 no producers would be willing to produce anything they need a price of 12.50 or higher to make any quantity at all profitable lastly we need to find the area of the producer Surplus triangle the area of a triangle is one half base times height the base of this triangle runs from a quantity of zero to a quantity of 50. so the base is 50. the height goes from a price of 12.5 up to a price of 25. that's a difference of 12.5 one-half times 50 times 12.5 is 312.5 which is the total producer Surplus this tells us how much profit the producer will earn before subtracting fixed costs if they have one hundred dollars in fixed costs for example their total economic profit would be two hundred and twelve dollars and fifty cents producers Surplus represents the excess benefit to the producer for each unit produced