Producer Surplus
Plain definition
Producer surplus is the difference between the price sellers receive and the minimum price they would have accepted — their supply price. Graphically it is the area above the supply curve and below the market price, up to the quantity traded.
In economics
Producer surplus measures seller gains from trade and, in the short run with fixed costs sunk, equals revenue minus variable cost. Together with consumer surplus it forms total surplus, the welfare benchmark: competitive equilibrium maximizes their sum, and any policy that shrinks total surplus creates deadweight loss.
Example
A potter willing to sell a vase for at least 400 rupees sells it for 650 — her producer surplus is 250 rupees. If 200 vases sell with an average gap of 180 rupees between price and minimum acceptable price, total producer surplus is 36,000 rupees.
Producer surplus is often equated with profit, but they differ by fixed costs. Producer surplus is revenue minus variable (avoidable) cost; profit subtracts fixed costs too. A firm can earn positive producer surplus while making an accounting loss if fixed costs are large — the surplus measures gains from producing, not overall profitability.