Producer surplus is the amount a seller is paid minus the cost of production.

Question

BlackTom AI · Accepted Answer

Consider the statement and unpack what producer surplus represents in basic supply-and-demand analysis.
Option 1: True. If we interpret 'cost of production' as the total cost incurred to produce all units, then the expression 'price received minus total cost' would resemble profit, not producer surplus. Producer surplus is not simply price minus total cost; profits take fixed costs into account as well, whereas producer surplus focuses on the difference between price and the marginal/variable costs relevant to producing each unit. Therefore this option misstates the standard concept in economics.
Option 2: False. In standard theory, producer surplus equals the area above the supply curve (which reflects marginal cost) and below the market price, effectively the difference between the price sellers receive and the marginal/variable costs of producing the units. It is not correct to subtract the entire cost of production (including fixed costs) from the price. The proper calculation captures the incremental or marginal costs, not the fixed-cost-inclusive total cost. Thus this option aligns with the conventional definition of producer surplus only if one misinterprets 'cost of production' as something other than marginal/variable costs, which is the common source of the error.
In summary, the intuitive error in the statement is treating producer surplus as price minus total cost, whereas the accepted concept relies on price minus marginal (or variable) costs for the units produced. The distinction between total cost and marginal/variable cost is what separates the two options.

Producer surplus is the amount a seller is paid minus the cost of production.

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