Introduction: In the words of Mankiw (2011), “Producer surplus is the amount a seller is paid minus the cost of the production. Producer surplus measures the benefit sellers receive from participating in a market” (p. 141). Contrary the consumer surplus which closely associates with the demand curve, producer surplus significantly depends upon the supply curve. Both consumer surplus and producer surplus serve as vital yardsticks of measuring the market efficiency which in turn defines the benefit of the buyers and sellers participating in the market. The following graph depicts the producer surplus.
Having understood the concept of producer surplus, an analysis of a recent article that studies the net economic benefits associated with the Small Business Innovation Research (SBIR) program. For the purpose of such study a derivation of producer and consumer surplus is proposed. In the paper, it has been illustrated that a business that licenses its technology to others or is sold outright, producer surplus equals licensing sales or the selling price of the business. Such illustration reaffirms the fact that unlike consumer surplus, producer surplus depends on the supply curve (Allen, Layson & Link, 2012, p. 1).
A further analysis into the calculation of economic benefits required a detailed business history of the businesses involved, which was unavailable at the time of the study. Therefore the study was furthered with the limited data available which suggests an underestimation of the economic benefits that are being calculated. Also, the outcome of the study could not take into consideration the detailed costs allocated for the purpose of relevant research which again made to few assumptions in order to reach to a conclusion for the study. A market a said to be efficient when the allocation of resources is done with the aim of maximising the total surplus. Hence it can be surely stated that not all the sellers (producers) and buyers (consumers) are effectively particiapting in the market which is therefore contributing towards obstruction of the market’s effciciency.
Producer’s surplus reflects the seller’s welfare, but the issue surrounding the concern is the extent to which the buyer’s welfare can be ovesighted. Market equilibrium is thus sought to be established in this scenario. Market equilibrium is that point where the producer and consumer surplus have reached the maximum point. The market is said to lose its equilibrium, where the producer’s surplus and the consumer’s surplus go beyond such maximum point. Such existence of equilibrium is again conditioned by the continuation of nonexistence of externalities in the scenario. In the event of any positive enternality, the absence of market equilibrium hampers the producer surplus as well as the consumer surplus and to restore such absence of market equilibrium, the government shoulders the responisibility of subsidiing such positive externality. Also in a scenario where both the buyers and sellers do not consider the consequence of their actions while determining the supply and demand levels placed by them especially in the presence of any externalities, the market equilibrium again gets disturbed. Taxes are known to give rise to deadweight losses which consequently leads to a fall in both the consumer as well as porducer surplus (Mankiw, 2012).
References
- Mankiw, G. N. (2012). Principles of Economics. Canale: Thomson Learning.
- Alen, D., Layson, K. S. & Link, N. A. (2012). Public Gains from Entrepreneurial Research: Inferences about the Economic Value of Public Support of the Small Business Innovation Research Program. Retreived from http://www.uncg.edu/bae/econ/research/econwp/2012/12-04.pdf
