amount that any profit-maximizing producer will accept for the product.
To accept any amount less than the marginal cost would reduce the firm’s
profits
For each unit sold, producer surplus is the difference between price and marginal cost.For a producer that sells many units of the product, total producer surplus
is the difference between price and marginal cost summed over all the
units sold. So, for an individual producer, total producer surplus is the
area above the marginal cost curve and below the price line.
For the industry as a whole, we need to know the industry supply curve in
order to compute overall producer surplus. Since in perfect competition
the industry supply curve is simply the horizontal sum of all firms’ MC
curves, producer surplus in a perfectly competitive market is the area
above the market supply curve and below the price line, as shown in
Figure 12-5.
The Allocative Efficiency of Perfect
Competition Revisited
In Chapter 5 we said that (allocative) efficiency exists in a market if the
total economic surplus is maximized. At that point, we did not make the
distinction between the two parts of total surplus—consumer surplus and
producer surplus. Now that we have identified these different parts of
total surplus, we can restate the conditions for allocative efficiency in a
slightly different way.