Question

Explain with the use of examples the difference between the following concepts: producer surplus and economic profit

Answer 1

ans: The main difference between producer surplus and economic profit is fixed costs, the costs of production that don't vary when the quantity is changed (i.e. rent, equipment purchase). Economic profit subtracts fixed costs, whereas producer surplus does not.

example of producer surplus....

The difference between the lowest available price for a cup of coffee and the highest price is the producer surplus. If a producer can perfectly price discriminate, it could theoretically capture the entire economic surplus.

example of economic profit.....

For Example: If a company had $250,000 in revenues and $150,000 in explicit costs, its accounting profit would be $100,000. The same company also had $50,000 in implicit, or opportunity costs. Its economic profit would be $50,000.