Glamor Economics

Chapter 55

Chapter 8, Section 2 Benefit income after removing costs - producer surplus

Producer surplus is the firm's profit after subtracting production costs from sales revenue.In order to better understand what is producer surplus, let's look at the following story.

A city boy named Kenin went to the country to buy a small donkey from a farmer for $100.After receiving the money, the farmer readily agreed and promised to bring the donkey to Kaining the next day.Early the next morning, the farmer rushed to tell Kaining: "Young man, I'm really sorry, my little donkey died just last night." Kaining said helplessly, "So that's how it is... Just give me that dead donkey."

After a while, the farmer met Kaining by chance on the street.The farmer asked: "What happened to the dead donkey?" Kenin said: "I held a lucky draw and gave the donkey as a prize. I sold a total of 500 tickets at $2 each So after deducting the $100 for the donkey and the $2 for refunding the ticket, I made $898.

The farmer asked again: "It's unbelievable! Is no one complaining about this?"

Kenin replied: "Of course there are people who are dissatisfied, but there is only one - the winner. He immediately protested when he saw that his prize was a dead donkey that could not be eaten, so I bought him a ticket." The money was returned to him."

Regardless of the moral aspect, we can understand Kening's way of making money as a low-price strategy to cater to consumer behavior.For Kenin, he bought a dead donkey for $100, but in the end he not only did not lose money but made a profit of $898, which is called producer surplus in economics.

Producer surplus is the income that producers get from selling a commodity minus the cost. To put it bluntly, it is the profit earned by the enterprise.The key issue here is the cost of each company. Whoever has the lowest cost will be able to obtain more producer surplus.If there are 3 computer suppliers, the cost of IBM is 7800 yuan, the cost of Lenovo is 7500 yuan, and the cost of ASUS is 7000 yuan. If they are all sold at the price of 8000 yuan, then they will each get 1 yuan for selling a computer , 200, and 500 producer surplus.At the same time, if these enterprises adopt new technology and management measures to further reduce costs, they can obtain more producer surplus.

Putting producer surplus and consumer surplus (see the link to the terms in this section) together, we can see that what they represent is actually the income obtained by buyers and sellers during the transaction process.We can also understand producer surplus and consumer surplus through the diagram below.Geometrically, it is equal to the area of ​​the triangle above the supply curve and below the market price.

We can also explain consumer surplus and producer surplus through specific examples in life.

Mr. Zhang wanted to decorate his house, so he designed a drawing by himself, and then went to a decoration company.When he came to the first decoration company, the boss took the drawings and calculated each project according to the house area and material requirements, saying that the whole project would cost 70000 yuan.Teacher Zhang thought it was too expensive, so the owner of the decoration company showed the detailed list to Teacher Zhang, saying that it could be 5000 yuan cheaper at most.Teacher Zhang saw that it was indeed the case, so he said it after going back and thinking about it.Mr. Zhang came to another decoration company with the drawings. The boss looked at the drawings and asked about the requirements. Based on the house area and material requirements, he calculated the accounts one by one and said that at least 65000 million yuan was needed.Teacher Zhang still said: Why is it so expensive?The boss also showed him the itemized list, saying that the price could only be reduced by 5000 yuan at most.Teacher Zhang carefully analyzed the two situations: the reason why the second one is cheaper is that the materials are directly purchased from the manufacturer, and the cost is reduced.So he decided to hand over the project to a second decoration company.

From this example, we can see that the reason why Mr. Zhang handed over the project to the owner of the second decoration company was because the price he quoted was low, and Mr. Zhang had consumer surplus.So did the second decoration company suffer?No, otherwise he wouldn't take the job and make a loss-making business.Because the owner of the second company reduces his own cost through direct purchase, making the cost lower than the price he quoted, and thus also obtains producer surplus.

[links to related words]

Consumer surplus is the difference between the price consumers are willing to pay and the price they actually pay for a commodity.

(End of this chapter)