Producers' Surplus

Suppose that Charles considers a CD worth $10 and Sam, who owns it, values it at only $2.00. Sam agrees to sell it to Charles for $5.00. We have seen that the value Charles gets but that he does not pay for ($5.00 in our example) is called consumers' surplus. But what of the $3.00 of value Sam gets because he sold something worth only $2.00 to him for $5.00? There is a surplus here, and it is called either producers' surplus or economic rent.1 Producers' surplus exists when actual price exceeds the minimum price sellers will accept.

Producers' surplus can appear as profit, but usually it takes a different form. Suppose, for example, that the price of corn has been $2.00 per bushel for many years. Then it rises to $3.00 per bushel and stays there. This higher price will draw more land into corn production, but this change is of no importance here. What is of interest is what happens to the farmers who were producing corn at $2.00 per bushel and now find that they can sell corn at $3.00. It certainly appears that these farmers are better off because a producers' surplus of $1.00 per bushel has appeared that was not there before.

However, let us separate farming into two parts: working the land and owning the land. Suppose that a farmer does not own the land he works, but rents it. It then becomes unlikely that this farmer will benefit at all from the higher price of corn. If those working the land obtained the surplus, there would be competition for the right to work land that is especially suited to growing corn. This competition should raise the value of the land, and therefore it will be the landowners, not the cultivators, who benefit from the higher price of corn. Because the earliest case of producers' surplus analyzed was one in which land captured the surplus, the producers' surplus is often called economic rent.

Producers' surplus is usually captured by resource owners rather than by producers. Hence the producers' surplus is not the same as profit. The resources that capture the surplus are those that are especially good at producing the product in question or that have no other uses, and hence will be used for that product even when prices are low. Sometimes the resource that captures economic rent is labor. The high pay that superstars in many fields earn is mostly producers' surplus. The basketball star paid $1 million who would still play for $25,000 earns $975,000 in producers' surplus. There is an interesting conclusion to this observation: The reason basketball tickets are high-priced is not because star athletes have high salaries (as owners sometimes allege), but rather the salaries are high because fans are willing to pay so much for the tickets to see the stars play.

We conclude this group of readings by putting the producers' and consumers' surpluses together on a graph.

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1Some books include an apostrophe in the terms, making them consumers' surplus and producers' surplus. Others do not, making the terms consumer surplus and producer surplus.

Copyright Robert Schenk