# Real life producer surplus

I'd like to ask a question about producer surplus. Basically I got the concept and how we calculate when a demand or price changes on a graph, but I cannot figure out how I should apply to real life.

I mean, let's say A = 10, B = 20 and Q = 5.

At first the producers accept to sell at the price $10. Is that right? And the revenue they get would be $$10 \cdot 5 = 50$$ but the producers managed to sell at the price of 20 and the revenue they get is $$20 \cdot 5 = 100$$. And the difference between what the producers get and what the producers would ask for is $$100 - 50 = 50$$. But when I calculate producer surplus using graphic (ABC), I get $$\frac{(20 -10 ) \cdot 5} { 2 } = 25$$ So I come to different conclusion in real life than when I calculate using graph. Why? Could anyone explain to me please? ## 1 Answer I think you misunderstood what the supply line represents. The function takes as its argument the number of units sold. It then returns the lowest price which the supplier of the last unit requires such that he is willing to sell. Thus, the profit would not be$10*5$. Instead, the last person willing to sell the good receives 0 profit as he is selling at the lowest price he is willing to accept. Counting in discrete units, we would have something like$10+7.5+5+2.5+0=25\$ profit. Each additional seller of a unit makes less profit than the previous one.

The flaw in your logic was that the first seller can really only provide a single unit at price 10 and not 5 units. The next unit already costs a bit more in production all the way till the last unit makes its producer just break even.

• +1 Just one small point re your last paragraph: as the graph is drawn, price 10 corresponds to zero units. A single unit would be provided at price 12. – Adam Bailey Sep 30 '15 at 6:05
• indeed, based on the graph the goods (if sold discretely at the integral of the supply function in that area) are sold at prices 9, 7, 5, 3, 1. But then again, technically we should not count the goods in units but treat these as volumes which apparently was the source of confusion of OP. – HRSE Sep 30 '15 at 7:23
The text passage contains a question about producer surplus in economics, including a numerical example and a calculation. An answer is provided that explains the misunderstanding in the question and corrects the calculation.
single_question_with_answer
Given a text passage, determine:
    1. If it contains a mathematical question (including word problems or calculations)
    2. If an answer to that mathematical question is provided in the text

First, describe the content structure you found in 1-2 sentences.

Then provide your analysis in the following format:
TYPE: <one of the following values>
- NO_QUESTION
- SINGLE_QUESTION
- SINGLE_QUESTION_WITH_ANSWER
- MULTIPLE_QUESTIONS
- MULTIPLE_QUESTIONS_WITH_ANSWERS
system
# Real life producer surplus

I'd like to ask a question about producer surplus. Basically I got the concept and how we calculate when a demand or price changes on a graph, but I cannot figure out how I should apply to real life.

I mean, let's say A = 10, B = 20 and Q = 5.

At first the producers accept to sell at the price $10. Is that right? And the revenue they get would be $$10 \cdot 5 = 50$$ but the producers managed to sell at the price of 20 and the revenue they get is $$20 \cdot 5 = 100$$. And the difference between what the producers get and what the producers would ask for is $$100 - 50 = 50$$. But when I calculate producer surplus using graphic (ABC), I get $$\frac{(20 -10 ) \cdot 5} { 2 } = 25$$ So I come to different conclusion in real life than when I calculate using graph. Why? Could anyone explain to me please? ## 1 Answer I think you misunderstood what the supply line represents. The function takes as its argument the number of units sold. It then returns the lowest price which the supplier of the last unit requires such that he is willing to sell. Thus, the profit would not be$10*5$. Instead, the last person willing to sell the good receives 0 profit as he is selling at the lowest price he is willing to accept. Counting in discrete units, we would have something like$10+7.5+5+2.5+0=25\$ profit. Each additional seller of a unit makes less profit than the previous one.

The flaw in your logic was that the first seller can really only provide a single unit at price 10 and not 5 units. The next unit already costs a bit more in production all the way till the last unit makes its producer just break even.

• +1 Just one small point re your last paragraph: as the graph is drawn, price 10 corresponds to zero units. A single unit would be provided at price 12. – Adam Bailey Sep 30 '15 at 6:05
• indeed, based on the graph the goods (if sold discretely at the integral of the supply function in that area) are sold at prices 9, 7, 5, 3, 1. But then again, technically we should not count the goods in units but treat these as volumes which apparently was the source of confusion of OP. – HRSE Sep 30 '15 at 7:23
user
The text passage contains a question about producer surplus in economics, including a numerical example and a calculation. An answer is provided that explains the misunderstanding in the question and corrects the calculation.

TYPE: SINGLE_QUESTION_WITH_ANSWER