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Introduction to Producer Surplus


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What Is Producer Surplus?
As stated in the introduction to consumer surplus, economists are quick to point out that markets create economic value for both producers and consumers. Producers get value when they can sell goods and services at prices higher than their costs of production, and consumers get value when they can buy goods and services at prices less than how much they actually value said goods and services. This former type of value represents the concept of producer surplus.

In order to calculate producer surplus, we need to define a concept called willingness to sell. A producer's willingness to sell (WTS, or WTA for "willingness to accept") for an item is the minimum amount that it would sell the item for. In general, willingness to sell in a market represents the marginal firm's marginal cost of production. (For example, if a supplier requires a minimum of $10 to sell an item, it must be the case that the marginal firm's marginal cost of producing that unit of the good is $10.)

Interestingly enough, the supply curve represents the willingness to sell (or, equivalently, marginal cost) of the marginal firm. For example, if supply of an item is 3 units at a price of $15, we can infer that the marginal firm faces a marginal cost of $15 for that item. and thus has a willingness to sell of $15.

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