Exam 7: Consumers, producers, and the Efficiency of Markets

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a. Producer surplus measures the benefit to sellers of participating in a market.It is measured as the amount a seller is paid minus the cost of production.For an individual sale,producer surplus is measured as the difference between the market price and the cost of production,as shown on the supply curve.For the market,total producer surplus is measured as the area above the supply curve and below the market price,between the origin and the quantity sold.
b. Because the supply curve shows the minimum amount sellers are willing to accept for a given quantity,the supply curve represents the cost of the marginal seller.
c. When the price of a good rises,producer surplus increases for two reasons.First,those sellers who were already selling the good have an increase in producer surplus because the price they receive is higher (area A).Second,new sellers will enter the market because the price of the good is now higher than their willingness to sell (area B);hence,there is additional producer surplus generated from their sales.The graph should show that as price rises from P₁ to P₂,producer surplus increases from area C to area A + B + C.