6 What is producer surplus? How is it measured? When price exceeds marginal cost, the firm receives a producer surplus. A producer surplus is the excess of the amount received from the sale of a good or service over the cost of producing it. Producer surplus is calculated as the price received for a good minus its minimum supply-price (or marginal cost), summed over the quantity sold.

Figure 5.4

(a) shows Maria’s producer surplus from pizzas when the price is €15 a pizza. At this price, she sells 100 pizzas a month because the 100th pizza costs her €15 to produce. But Maria is willing to produce the 50th pizza for her marginal cost, which is €10. So she receives a producer surplus of €5 on this pizza.

Maria’s producer surplus is the sum of the surpluses on each pizza she sells. This sum is the area of the blue triangle – the area below the market price and above the supply curve. The area of this triangle is equal to its base (100) multiplied by its height (€10) divided by 2, which is €500. The red area in Figure 5.4

(a) below the supply curve shows what it costs Maria to produce 100 pizzas.