Producer Surplus

The amount consumers are willing to pay for goods and services and the amount sellers are willing to accept determine prices in a free-market economy. In other words, the market sets the price goods and services. If the market price is lower than the minimum amount that a producer is willing to accept, the producer will choose not to sell. However, if the price is higher than their minimum price then not only will they sell, they also have an added benefit: a gain from trade called producer surplus, which is the difference between the minimum price at which an individual supplier (or the market) would be willing to sell a good or service and the actual market price that they receive. This gain exists because the producer is receiving a price that is greater than their supplier's cost—not only is it covering the cost of producing that unit of output (i.e., marginal cost), but they are earning some extra money as well.

Just as every consumer has a maximum price at which they are willing to buy, every producer has a minimum acceptable price at which they are willing to sell. At the very least, they want to cover their costs. This minimum price at which an individual producer is willing to sell is known as the seller's cost. Any time that a store advertises that they are "selling at cost," this is what they mean. In this case, they are not making any profit on the sale; they are just breaking even. In terms of production, in economics the lowest acceptable price is typically defined as the price that covers a firm's marginal cost—the additional cost that the firm incurred by producing that one particular unit of output.

The supply schedule, a table that shows the quantity supplied of a good at different prices, shows the different minimum prices at which six coffee shops are willing to sell a cup of coffee.