Explain the idea of producer surplus.  

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pohnpei397 eNotes educator| Certified Educator

When producers sell goods or services they, of course, charge a certain price for those products.  The price, multiplied by the number of products they sell, is their revenue.  In almost all cases, producers sell their products at a price that is higher than the minimum price that they would accept.  When they do this, they make more revenue than the minimum they would be willing to accept.  The revenue that they make that is greater than the minimum is their producer surplus.

Producers are generally willing to sell their products at any price that will bring them a profit.  Of course, they will prefer to sell at the price that brings them the maximum profit, but they will accept a lower price.  However, the producers do not set the equilibrium price on their own.  Instead, the price is set by a combination of supply and demand.  When demand is high, the price can be much higher than the minimum that producers would accept.  In this sort of a situation, the producers will make more money than they would have if they sold at their minimum acceptable price.  This excess money is their producer surplus. 

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