International Trade - Theory and Policy, 2010a

Changes in Producer Surplus
Suppose the demand for a good rises, represented by a rightward shift in the demand curve from D to D′
in Figure 7.11 "Depicting a Change in Producer Surplus". At the original price, P 1 , producer surplus is given by
the yellow area in Figure 7.11 "Depicting a Change in Producer Surplus" (the triangular area between
the P 1 price and the supply curve). The increase in demand raises the market price to P 2 . The new level of
producer surplus is now given by the sum of the blue and yellow areas in the figure (the triangular area
between the price P 2 and the supply curve). The change in producer surplus, PS, is given by the blue area
in the figure (the area between the two prices and the supply curve). Note that the change in producer
surplus is determined as the area between the price that prevails before, the price that prevails after, and
the supply curve. In this case, producer surplus rises because the price increases and output rises. The
increase in price and output raises the return to fixed costs and the profitability of firms in the industry.
The increase in output also requires an increase in variable factors of production such as labor. Thus one
additional benefit to firms not measured by the increase in producer surplus is an increase in industry
employment.
Figure 7.11 Depicting a Change in Producer Surplus
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