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What is producer surplus? Why can it be measured as the area above a firm's marginal...

What is producer surplus? Why can it be measured as the area above a firm's marginal cost curve and below the price line? How does it relate to a firm's profits?

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Answer #1

Producer surplus can be defined as the difference between the price of the goods and the cost of the goods to the sellers.

Since the cost of the goods is shown in the graph by the supply curve and the price is shown by the equilibrium price and it is determined by the intersection of supply and demand curve.

The firm profit will be = total revenue - total cost.

Since the total revenue will be determined by the product of the price and quantity sold and the total cost will be the total cost of supplying the equilibrium quantity. Hence the producer surplus will be equal to the firm profit. In the diagram, it has been shown by the shaded triangle.

Hence the producer surplus relates to the firm profit.

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