Chapter 4, Problem 1RQ

To determine

Producer surplus and worker surplus.

Explanation of Solution

Producer surplus in a labor market is an advantage taken by the producer due to the variations in the value of marginal product of the labor and the value of total product. Producer surplus is represented by the area above the competitive wage and below the demand curve, whereas worker surplus refers to the difference between the competitive wage that is earned by the worker and the opportunity cost of workers’ time. The area below the competitive wage and above the supply curve represents worker surplus.

Figure 1 shows equilibrium in a competitive labor market. In this figure, employment is measured on the horizontal axis and the wage rate in dollars is measured on the vertical axis. The triangle P, which is above the wage rate and under the demand curve, gives the producer surplus and the triangle Q, which is above the supply curve and under the wage rate gives the worker surplus. Gains from the trade is the summation of producer surplus and worker surplus (P+Q). A competitive equilibrium makes effective distribution of labor resources and hence it takes full advantage from trade.

Economics Concept Introduction

Producer surplus: Producer surplus in a labor market is an advantage taken by the producer due to the variations in the value of marginal product of the labor and the value of total product.

Worker surplus: Worker surplus refers to the difference between the competitive wage that is earned by the worker and the opportunity cost of workers’ time.