Principles of Economics- Mankiw (5th) 145

Principles of Economics- Mankiw (5th) 145 - CHAPTER 7...

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CHAPTER 7 CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS 151 HOW A HIGHER PRICE RAISES PRODUCER SURPLUS You will not be surprised to hear that sellers always want to receive a higher price for the goods they sell. But how much does sellers’ well-being rise in response to a higher price? The concept of producer surplus offers a precise answer to this question. Figure 7-6 shows a typical upward-sloping supply curve. Even though this supply curve differs in shape from the steplike supply curves in the previous fig- ure, we measure producer surplus in the same way: Producer surplus is the area below the price and above the supply curve. In panel (a), the price is P 1 , and pro- ducer surplus is the area of triangle ABC. Panel (b) shows what happens when the price rises from P 1 to P 2 . Producer surplus now equals area ADF. This increase in producer surplus has two parts. First, those sellers who were already selling Q 1 of the good at the lower price P 1 are better off because they now get more for what they sell. The increase in producer
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