Alfred Marshall in his famous work ‘Principles of Economics’ explained the concept of producer surplus. This concept measures the benefit that sellers receive from participating in the market. Therefore, producer surplus measures the welfare of the producer. Producer surplus is the benefit that producers receive over his cost of providing goods against what he is paid for that good. It means the producer’s surplus is the amount a seller is paid minus the cost of production. So, it is the difference between the actual price received by sellers and the cost of producing a product.
It can be measured by using the following formula.
Producer’s Surplus (P.S) = Amount Received by Seller or Actual Price Paid to Seller- Minimum Supply Price or Cost of Seller
For example, if a seller wants to sell a car at Rs. 35, 00,000 but the actual price of the car in the market is Rs. 45, 00,000. Here, the producer’s surplus is Rs. (45, 00,000-35, 00,000) = Rs. 10, 00,000.
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