# Producer Surplus: Definition, Formula, and Example

> **Definition**
>
> A producer surplus represents the benefit producers gain from selling a product or service at a price that is higher than they're willing to accept.

## What Is Producer Surplus?

A producer surplus is the extra money that a company earns when they sell a product or service for more than they expected. Let's say a farmer sells eggs at the market at $3 per dozen. That's the lowest price they'd be willing to accept. But patrons at the market would gladly spend $4 per dozen to buy their eggs. That extra $1 per dozen is the producer surplus. Producer surplus can encourage investment, innovation, and more production  

### Key Takeaways

*   Producer surplus is the amount a producer gets from selling a product at a price over their expected price.
*   The total revenue that a producer receives from selling their goods minus the marginal cost of production equals the producer surplus.
*   Producer surplus plus consumer surplus represents the total economic benefit to everyone in the market from participating in the production and trade of the good.

![Producer Surplus](https://www.investopedia.com/thmb/BtxBa7oKnraf3qFVjDt9JD37ZVo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/producer_surplus.asp-final-037e3d48383b46a99fad34132c5cab86.png)

*Economists and governments can use producer surplus to determine how well resources are being used in the economy. — Jiaqi Zhou / Investopedia*

## Understanding Producer Surplus

A producer surplus is shown graphically below as the area above the producer’s [supply curve](https://www.investopedia.com/terms/s/supply-curve.asp) that it receives at the price point (P(i)), forming a triangular area on the graph. The producer’s sales revenue from selling Q(i) units of the good is represented as the area of the rectangle formed by the axes and the red lines, and is equal to the product of Q(i) times the price of each unit, P(i).

Because the supply curve represents the marginal cost of producing each unit of the good, the producer’s total cost of producing Q(i) units of the good is the sum of the marginal cost of each unit from 0 to Q(i) and is represented by the area of the triangle under the supply curve from 0 to Q(i).

Subtracting the producer’s total cost (the triangle under the supply curve) from their total revenue (the rectangle) shows the producer’s total benefit (or producer surplus) as the area of the triangle between P(i) and the supply curve.

### Formula for Producer Surplus

> **Total revenue - marginal cost = producer surplus**

The size of the producer surplus and its triangular depiction on the graph increase as the [market price](https://www.investopedia.com/terms/m/market-price.asp) for the good increases, and decrease as the market price for the good decreases.

![Producer Surplus](https://www.investopedia.com/thmb/3OI6VsaoleFN6v-U13Mirssuga8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/producer_surplus_final-680b3c00a8bb49edad28af9e5a5994ef.png)

*— Image by Julie Bang © Investopedia 2019*

## Special Considerations

Producers would not sell products if they could not get at least the marginal cost to produce those products. The supply curve as depicted in the graph above represents the [marginal cost curve](https://www.investopedia.com/terms/m/marginalcostofproduction.asp) for the producer.

From an economics standpoint, [marginal cost](https://www.investopedia.com/ask/answers/051815/what-difference-between-marginal-benefit-and-marginal-cost.asp) includes opportunity cost. In essence, an opportunity cost is the cost of not doing something different, such as producing a separate item. The producer surplus is the difference between the price received for a product and the marginal cost to produce it.

Because marginal cost is low for the first units of the good produced, the producer gains the most from producing these units to sell at the market price. Each additional unit costs more to produce because more and more resources must be withdrawn from alternative uses, so the marginal cost increases and the net producer surplus for each additional unit is lower and lower.

### Producer Surplus vs. Profit

Profit is a closely related concept to producer surplus; however, they differ slightly. [Economic profit](https://www.investopedia.com/terms/e/economicprofit.asp) takes revenues and subtracts both fixed and variable costs. Producer surplus, on the other hand, only takes off variable (marginal) costs.

## Consumer Surplus and Producer Surplus

A producer surplus combined with a [consumer surplus](https://www.investopedia.com/terms/c/consumer_surplus.asp) equals overall economic surplus, or the benefit provided by producers and consumers interacting in a free market as opposed to one with price controls or quotas. If a producer could [price discriminate](https://www.investopedia.com/terms/p/price_discrimination.asp) correctly, or charge every consumer the maximum price the consumer is willing to pay, then the producer could capture the entire economic surplus. In other words, producer surplus would equal overall economic surplus.

However, the existence of producer surplus does not mean there is an absence of consumer surplus. The idea behind a [free market](https://www.investopedia.com/terms/f/freemarket.asp) that sets a price for a good is that both consumers and producers can benefit, with consumer surplus and producer surplus generating greater overall economic welfare. Market prices can change materially due to consumers, producers, a combination of the two, or other outside forces. As a result, profits and producer surplus may change materially due to market prices.

## Producer Surplus Example

Say that there are 20 companies that make widgets, each producing them at slightly different costs. ranging from $2.50 to $3.50 per widget. In the market, there is an [equilibrium](https://www.investopedia.com/terms/e/equilibrium.asp) point where the amount of widgets supplied meets demand at $3.

The producer surplus would define those producers who can make widgets for less than $3 (down to $2.50), while those whose costs are up to $3.50 will experience a loss instead. For the lowest-cost producer, they would enjoy a surplus of $0.50 per widget.

## How Do You Measure Producer Surplus?

With supply and demand graphs used by economists, producer surplus would be equal to the triangular area formed above the supply line over to the market price. It can be calculated as the total revenue less the marginal cost of production.

## What Is Producer Surplus Simply Put?

Put simply, producer surplus is the difference between the price that companies are willing to sell products for and the prices that they actually get for them.

## What Is Total Surplus?

[Total economic surplus](https://www.investopedia.com/ask/answers/041715/what-difference-between-consumer-surplus-and-economic-surplus.asp) is equal to the producer surplus plus the consumer surplus.

## The Bottom Line

Producer surplus is good for the [economy](https://www.investopedia.com/terms/e/economy.asp) because it motivates producers to make and supply goods and services, since they can earn more than their production costs. It usually translates to increased profitability that can be reinvested in the business, leading to expansion, job creation, and development of new products or services. Finally, it helps to allocate resources efficiently, thus directing them toward their most valuable uses, and contributes to overall economic welfare and prosperity.

However, producer surplus assumes [perfect competition](https://www.investopedia.com/terms/p/perfectcompetition.asp), meaning it doesn’t always capture real-world complexities. It can also be affected by price controls or quotas, leading to inefficiencies.