Measuring Producer Surplus & Calculating Total Surplus
Measuring Producer Surplus: Producer surplus measures the gain the companies receive when they can sell their product at a higher price then the one they were willing to get of a product or service. You can calculate the producer surplus for discrete goods and services in the same way you can calculate the consumer surplus for each one of them.
Calculating Total Surplus: Total surplus that a society receives by producing the optimum level for society of a good or service is simply the added surplus from the consumer and the producer surplus that is caused by that product level.
Considering Total Surplus: Total surplus is very important because it quantifies the gains that come about from production and exchange. Companies do things to obtain a benefit and people spend money on those things because buying and consuming them makes them happy. The total surplus tells them exactly in what measure the situation has improved for the consumers and producers after they interact with each other.
By quantifying the gains of these interactions, the total surplus also provides a point of reference with which economists are able to measure the damage that comes about from the governmental policies that interfere with the market. It is one thing for example to say that the subsidies of prices cause damage to the consumers, but it is another thing to say exactly how the consumers become affected in dollar amount exactly.
When Free Markets Lose Freedom: Economy experts love free markets because these only produce units for which the benefits exceed the costs. In other words, the market balance ensures that the total surplus will be as high as possible.
Anything that interferes with the capacity of the market to reach balance and produce the market amount reduces the total surplus. Economy experts refer to the amount in which the total surplus is reduced with the term deadweight loss.
These types of interferences in the market are under the control of the government, but you should not only believe that deadweight loss is only caused by government policies. Anything that reduces the product under the market amount causes a deadweight loss. Monopolies and oligopolies can be blamed for this, as well as asymmetric information and the problems caused by public goods.
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