Lecture on Producer Surplus and Economic Surplus

Introduction to Producer Surplus

• Economic surplus = sum of everyone's costs and benefits.
• Consumer surplus alone doesn't tell the whole story; producer surplus is also crucial.
• Example: Chrysler benefits from producing minivans, just as consumers benefit from purchasing them.

Law of Supply

• Illustrated with example of Dwight's beet farm:
  • As price increases, so does quantity supplied.
  • Price = $1, one beet produced; price = $2, more beets, etc.

Calculating Profits

• Profit is calculated as the difference between selling price and marginal cost.
• Supply curve = marginal cost curve.
• Example: If a beet sells for $3 and costs $1 to produce, the profit is $2.

Definition of Producer Surplus

• Difference between price producers receive and minimum price they are willing to accept.
• Minimum price = marginal cost of production.
• Producer surplus = area between supply curve and price.

Total Welfare and Surplus

• Consumer surplus: area below demand curve and above price.
• Producer surplus: area above supply curve and below price.
• Total surplus is maximized when market is in equilibrium.

Equilibrium and Efficiency

• Market equilibrium: quantity supplied = quantity demanded.
• Equilibrium maximizes total surplus and is efficient.
• Prices above or below equilibrium result in missing economic surplus.
• Example of missing trades and surplus when prices are not at equilibrium.

The Invisible Hand

• Concept introduced by Adam Smith in 1776.
• Market efficiently allocates resources through self-interested actions of individuals.
• Pursuing self-interest leads to efficient market outcomes.

Conclusion

• While market equilibrium is efficient, future discussions will cover instances where markets might not be efficient.