Producer’s surplus

Producer surplus can be defined as the difference between the market price received by the seller and the price he would have been prepared to supply at.

Example – The cost of producing a pen ( including normal profit) is Rs 12 per unit for a producer Mr. X. And he wants the pen to be sold at Rs 16. So, the per unit producer surplus is Rs 4(Rs 16- Rs 12 ).

** remember that cost of production includes the price paid for all factors of production( land, labour, capital and entrepreneur) and the price paid for the entrepreneur is profit.

So, Producer Surplus = Price received – (linked to factor cost (including element of normal profit)

Or Producer surplus = abnormal profit