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Video transcript

we've now talked a lot about the demand curve and consumer surplus now let's look at the other side let's think about the supply curve and you could imagine that there might be something called the producer surplus so that let's say this is the price axis this is the quantity axis and let's say that we are running let's say we are running some type of a Berry Farm and this is our supply curve that is the supply supply curve and this is our demand curve so that is demand and just like we did with the supply curve for the demand curve now instead of thinking of a price and thinking about how much quantity would be supplied let's think about a given quantity and think about what the price would have to be in order for the producers to produce that quantity and so let's say that this quantity right over here this is in thousands thousands of pounds of berries thousands of pounds so this is 1,000 pounds two thousand pounds three thousand pounds four thousand pounds and five thousand pounds and let's say that this price right over here is one dollar per pound $2 $3 $4 so I could do that a little bit more even so this is three dollars this is four dollars this is five dollars per pound and this is let me write this this is all in per pound per pound so let's say that we we want the suppliers to produce 1,000 pounds of berries so this is we want them to produce 1000 pounds of berries what does the price have to be for them to produce 1000 pounds of berries well think of it from the suppliers or from the berry farmers point of view if they're going to produce 1000 pounds of berries in order for them to produce it in order to convince them to produce it they have to get at Liam as much as they would get using those same resources to produce something else so if they could get if they could get a dollar per pound or the equivalent in dollars of $1.00 per pound for those first thousand pounds so about a thousand dollars if they could get that to by producing their and for an apple orchard or for using it to to graze or maybe renting out the land to someone else that's the minimum you would have to pay them because if you paid them less than that then they would do the other thing they would go and they would go in and and and rent their land out or they would allow their land for grazing so you would have to pay them you would have to pay them the opportunity cost for them producing those thousand pounds so the opportunity cost for them producing those thousand pounds would be right over there and this is on average the first thousand pounds you could also think in that very first pound the opportunity cost would be right over there then the next pound would be right after that the the 500th pound would be there the thousandth pound would right be there or you could say the first thousand pounds on average would be right over there now let's say that we wanted them to produce another thousand pounds so we want the whole market or this entire farm to produce or maybe it's multiple farms to produce a total of two thousand pounds what would we have to do well same exact thing we're kind of assuming that maybe the market is already producing that first thousand pounds so now we would have to think about well what are they giving up to produce that next thousand pounds and now we would assume that they that for that first thousand pounds they would have used the land and the inputs that are most suitable so this is the most suitable most suitable resources most suitable resources so we're talking about the labor that really knows how to grow berries the land where berries are best grown and maybe they're really close to transportation networks so it's much cheaper to produce and ship from there but now if we want another two thousand pounds of berries in this time period and maybe this is over you know this is per year over here if we want another thousand pounds they're now going to have slightly less suitable resources maybe the land that's slightly further away from transportation resources there now we're going to have labor that is slightly less efficient they're going to have to take land away from that might have been slightly more suitable for other things so now the opportunity cost for these growers for the next thousand pounds is going to be slightly higher so their opportunity cost is going to be like that on average for the next thousand pounds you could say the opportunity cost for the one thousand and first pound will be right over there for mm pound would be right over there but on average for the two thousand pounds this is their opportunity cost now same thing the next thousand pounds after that if we want to get the market if we want the whole supply to be three thousand pounds they would have to produce they would have to get that their opportunity cost of that incremental thousand pounds that opportunity cost of that incremental thousand pounds and so viewed is it this way the supply curve no longer and it is the same exact curve before we to say oh if we want to if we want to if how much would people produce if the price were three dollars you say oh they produce three thousand pounds now we're looking at it the other way where we're saying if we want the suppliers to produce three thousand pounds what would the price actually have to be now with that out of the way now we can think about the supply curve is really our opportunity cost curve for the suppliers and let's say that this is the supply in the demand and then this would be the actual price at which supply equals demand right over there and so let's just say that that is the market price so what's going on over here all of the suppliers so this the price here is just for making the math simple let's just say that the price here is $4 and the quantity demanded and the quantity supplied here is 4,000 pounds what's going on here this the very 4,000 pound the produced by the suppliers the opportunity cost for them to produce it would be $4 and they're going to get $4 exactly for it so they're right on the fence but for the the first three thousand nine hundred and ninety-ninth pounds the opportunity cost of producing it was lower than the price they're getting so in this situation the producers are getting more the for the first three thousand nine hundred ninety nine pounds they're getting more for their berries than their opportunity cost and just like we talked about consumer surplus this is the producer surplus so for example for these first thousand pounds for these first thousand pounds right here the producers their opportunity cost was a little over a dollar a pound but they're getting $4 a pound for it for the next thousand pounds the opportunity cost is approaching two dollars a pound is like a dollar seventy-five just eyeballing it once again they're getting $4 a pound for it so good they're getting this surplus and so if you think about the entire market the producers as a whole they're getting this entire area this entire area represents the excess value that they're getting above and beyond their opportunity cost and recall this right over here the producer surplus producer surplus and since we're assuming or we will assume a linear supply curve right over here this is just a triangle finding an area of a triangle this this length right on this side is just 4 minus 1 it's just 3 $3 per pound and then this length right over here is 4,000 pounds 4,000 pounds so to find the producer surplus we're just finding the area of this region so let me write this the producer surplus here is just going to be I'll use the same colors three times I want to do is that pink three three times the four thousand times the four thousand and that would give us the area of this entire rectangle so we have to divide it by two and if this is just defining the area of a triangle so times one-half the same thing as dividing by two and so this gives us 1/2 times 4,000 is 2,000 times three is six thousand and you can look at the units it's 6,000 or it's three dollars per pound times thousands of pounds per week so we end up with so the we end up with six thousand dollars of producer surplus per per week
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