Producer surplus is defined as the difference between what a producer is willing to supply a good for and the price they actually receive.
If a producer is willing to supply a good onto the market for £10 but the market price is £20 then this producer will earn a welfare bonus of £10.
This welfare bonus is known as producer surplus.
Producer surplus can be shown on a diagram. It is equal to the area above the supply curve below the price line.
The introduction of a minimum price per unit of alcohol, set above the equilibrium price, will lead to a reduction in consumer surplus and an increase in producer surplus as shown in the diagram below.
Consumer surplus before the minimum price is equal to area ABC.
Consumer surplus after the minimum price is imposed is equal to area AFE.
Producer surplus before the minimum price is equal to area BCD. Producer surplus after the minimum price is imposed is equal to area EFGD.
The introduction of the minimum price leads to a deadweight welfare loss of FBG.
Clearly if the minimum price was set below the equilibrium, it would have no impact on consumer or producer surplus
queen babito answered the question on July 9, 2018 at 12:00
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