Suppose that Charles considers a CD worth $10 and Sam,
who owns it, values it at only $2.00. Sam agrees to sell it
to Charles for $5.00. We have seen that the value Charles
gets but that he does not pay for ($5.00 in our example) is
called consumers' surplus. But
what of the $3.00 of value Sam gets because he sold
something worth only $2.00 to him for $5.00? There is a
surplus here, and it is called either producers'
surplus or economic rent.1 Producers'
surplus exists when actual price exceeds the minimum price
sellers will accept.
Producers' surplus can appear as profit, but usually it
takes a different form. Suppose, for example, that the price
of corn has been $2.00 per bushel for many years. Then it
rises to $3.00 per bushel and stays there. This higher price
will draw more land into corn production, but this change is
of no importance here. What is of interest is what happens
to the farmers who were producing corn at $2.00 per bushel
and now find that they can sell corn at $3.00. It certainly
appears that these farmers are better off because a
producers' surplus of $1.00 per bushel has appeared that was
not there before.
However, let us separate farming into two parts: working
the land and owning the land. Suppose that a farmer does not
own the land he works, but rents it. It then becomes
unlikely that this farmer will benefit at all from the
higher price of corn. If those working the land obtained the
surplus, there would be competition for the right to work
land that is especially suited to growing corn. This
competition should raise the value of the land, and
therefore it will be the landowners, not the cultivators,
who benefit from the higher price of corn. Producers' surplus is
often called economic rent because David Ricardo first introduced the concept to explain the source of land rent.
Producers' surplus is usually captured by resource owners
rather than by producers. Hence the producers' surplus is
not the same as profit. The resources that capture the
surplus are those that are especially good at producing the
product in question or that have no other uses, and hence
will be used for that product even when prices are low.
Sometimes the resource that captures economic rent is labor.
The high pay that superstars in many fields earn is mostly
producers' surplus. The basketball star paid $1 million who
would still play for $25,000 earns $975,000 in producers'
surplus. There is an interesting conclusion to this
observation: The reason basketball tickets are high-priced
is not because star athletes have high salaries (as owners
sometimes allege), but rather the salaries are high because
fans are willing to pay so much for the tickets to see the
We conclude this group of readings by putting
the producers' and consumers' surpluses together on a
1Some books include an apostrophe
in the terms, making them consumers' surplus and producers'
surplus. Others do not, making the terms consumer surplus
and producer surplus.