Consumer and Producer Surplus

Calculating the Producer Surplus as an Area

The sum of individual producer surpluses is the total producer surplus, shown on a graph as the area above the supply curve and below the market price.
When the supply curve is drawn as a step diagram, each seller's producer surplus (the area above their minimum price and below the market price) is also the area of a rectangle. To calculate this area, the base of the rectangle is multiplied by its height. Here, Rise 'N' Shine's surplus is $2.00 (market price) minus $0.50 (price at which Rise 'N' Shine sells), which is $1.50. Similarly, Super Cup's surplus is $2.00$1.00=$1.00\$2.00\;-\;\$1.00\;=\;\$1.00 , and Hot Cuppa's surplus is $2.00$1.50=$0.50\$2.00\;-\;\$1.50\;=\;\$0.50 . Thus, total producer surplus for this market is $3 ($1.50+$1.00+$0.50=$3.00)(\$1.50\;+\;\$1.00\;+\;\$0.50\;=\;\$3.00) .
To calculate the producer surplus for sellers in this market, multiply the base of their step (the quantity) by the height of their step (market price minus seller's price). The base of each step in this case is 1 cup of coffee. Total producer surplus in this market is the sum of the seller surpluses.
A supply curve drawn as a step diagram is useful when there are only a few potential producers in the market. With a big market that has a large number of producers in it, those individual steps will smooth out resulting in a supply curve that is a upward sloping line. For example, there are around 24,000 coffee shops in the United States. The average price of a cup of coffee in a coffee shop in this market is $2.38, with about 400 million cups of coffee sold per day. The producer surplus is calculated based on quantity of cups sold and price per cup.
The U.S. coffee market serves around 400 million cups per day at an average price (market price) of $2.38 per cup. The producer surplus for this market is the area above the supply curve and below the market price.
Because of the size of the market, the producer surplus (the area below the curve and above the market price) is now the area of a triangle,
12×base×height\frac12\times base\times height
, or
12×400million×$1.38=$276million\frac12\;\times\;400\;\mathrm{million}\;\times\;\$1.38=\$276\;\mathrm{million}
in the case of the U.S. coffee market.