We have now talked a lot about the demand curve
and the consumer surplus;
now let's look at the other side.
Let's think about the supply curve
and you could imagine that there might be
something called the producer surplus.
So let's say that this is price axis,
this is the quantity axis
and let's say that we are running some type of a berry farm
and this is our supply curve.
That is the supply curve and this is our demand curve.
So that is the demand
and just like what we did to the supply curve,
for the demand curve, now instead of thinking of a price and
think about how much quantity would be supplied,
let's think about a given quantity and think about what price
would it have to be in order for the producers to produce
that quantity.
And let's say that this quantity right over here, this is
in thousands of pounds of berries, thousands of pounds.
So this is 1 thousand pounds, 2 thousand pounds, 3 thousand
pounds, 4 thousand pounds, and 5 thousand pounds.
And let's say this price right over here is 1 dollar per pound,
$2, $3, $4, maybe I could make it more even,
so this is $3, this is $4, this is $5 per pound.
Let me write this all in per pound.
So let's say that we want the suppliers to produce
1 thousand pounds of berries, so this is we want them to
produce 1 thousand pounds of berries,
What does the price have to be for them to produce
1 thousand pounds of berries. Well think of it from the suppliers
from the berry farmers' point of view. If they are going
to produce 1 thousand pounds of berries. in order for them
to produce it, in order to convince them produce it,
they have to get at minimum as much as they would get
using the same resources to produce something else.
So if they could get a dollar per pound or equivalent in dollars
of a dollar per pound for those first thousand pounds,
so about a thousand dollars. If they could get that by using their
land for an apple orchard or using it to graze or maybe renting
out the land to someone else, that's the minimum you would
have to pay them. Because if you pay them less than that
they would go do the other thing. They would go and rent
their land out or they will allow their land for grazing.
So you would have to pay them the opportunity cost
for them to produce a thousand pounds. So the opportunity
cost for them to producing a thousand pounds would be right
over there. And this is on average first thousand pounds
you could also think that the very first pound, the opportunity
cost would be right over there, and the next pound would be right
after that. The five hundred pound would be there,
the thousand pound would right be there. or you could say
the first thousand pound on average would be right over there.
Now let's say that we wanted them to produce another
thousand pounds. So we want the market or this entire farm
to produce or maybe it's multiple farms to produce a total
of two thousand pounds. What would we have to do?
Well, same exact thing. We kind of assuming the market
is already producing that first thousand pounds. So now we
would have to think about what are they giving up to
produce that next thousand pounds. And now we would
assume that for that first thousand pounds, they would have
used the land and the inputs that are most suitable
so this is the most suitable resources. So we are talking
about the labour that really knows how to grow berries.
The land where the berries are the best grown and maybe
they are really close to transportation networks so it's much
cheaper to produce and ship from there. But now if we want
another two thousand pounds of berries at this time period
and maybe this per year if we want another thousand pounds.
They are now going to less suitable resources,
maybe the land is slightly further away from the transportation resources,
they are now going to have labours that are slightly less
efficient, they are going have to take land away from that.
might have been slightly more suitable for other things.
So now the opportunity cost for these growers for the next thousand pounds
is going to be slightly higher.
So their opportunity cost is going to be like that on average
for the next thousand pounds. You could that the opportunity cost for the one thousand pounds will be right over there
for the two thousand pounds would be right over there. But
on average for the two thousand pounds, this is their opportunity cost
now, same thing, the next thousand pounds after that If we
want to get the market, if we want the whole supply be three thousand pounds
they would have to produce, they would have to get that
their opportunity across that incremental thousand pounds
that opportunity cost of that incremental thousand pounds.
So view it as this way, the supply curve no longer and it is
the same exact curve, before we used to say, oh if we want
how much would people produce if the price were 3 dollars.
Oh they produce 3 thousand pounds, now we are looking at
the other way, we are saying if we want the suppliers to
produce 3 thousand pounds, what would the price actually
have to be. Now with that out of the way, now we can think
about the supply curve is really a opportunity cost curve
for the suppliers. And let's say that this is supply and the
demand, and then this would be the actual price which
supply equals demand right over there so let's
just say that is the market price. So what's going on
over here, all of the suppliers, so this is the price
here let's just for making the math simple, let's just say
that price here is 4 dollars and the quantity demanded
and the quantity supplied here is 4 thousand pounds. What's going on
here, the very first 4 thousandth pound produced by the
suppliers, the opportunity cost for them to produce it
would be 4 dollars. We are gonna get exactly 4 dollars for it
so they are right on the fence. but for the first three
thousand 999 pounds, the opportunity cost of producing it
was lower than the price to get it, so in this situation
the producers are getting more, for the first 3999 pounds.
They are getting more for their berries than their opportunity
cost and just like we talked about, the consumer surplus,
this is the producer surplus. So, for example, for the first thousand pounds right here,
the producers, their opportunity cost was a little over a dollar a pound
but they are getting 4 dollars a pound for it.
For the next thousand pounds, the opportunity cost is approaching
2 dollars per pound, like a $1.75, just eyeballing it.
Once again, they are getting 4 dollars a pound for it
so they are getting this surplus, so if you think about
the entire market, the producers as a whole, they are getting this entire
area, this entire area represents the excess value that they are getting above and beyond
their opportunity cost, and we call this right over here the
producer surplus, the producer surplus. And we are assuming
or we will assume a linear supply curve
right over here. This is just a triangle, the area of
a triangle. This length right on this side is just 4-1,
it's just 3, 3 dollars per pound
and then this length right over here is 4 thousand
pounds, 4 thousand pounds. So to find the producer surplus,
we are just finding the area of this region.
So, let me write this, the producer surplus
here is going to be, I will use the same color,
3 times, I want to do it with pink,
3 times the 4 thousand, and that would give us
the area of this entire rectangle, so we have to divide it
by 2. That's just finding the area of the triangle,
so times one half, dividing by 2. And so this gives us one
half times 4 thousand is 2 thousand times 3 is 6 thousand.
And you could look at the unit, it's 6 thousand
or 3 dollars per pound times thousand of pounds per week
so we end up with, so the, we end up with 6 thousand dollars
of producers' surplus per week.