Question

The supply curve for agricultural labour is given by W=6+0.1L, where is the wage (price per unit) and the L quantity traded. Employers are willing to pay a wage of $12 to all workers who are willing to work at that wage; hence the demand curve isW=12.(a) Illustrate the market equilibrium, if you are told that the equilibrium occurs where L=60. (b) Compute the supplier surplus at this equilibrium.

Answer 1

Producer surplus means the amount received from selling a good minus the amount that the seller needed to receive, if he is willing to sell the good. Market equilibrium is at that point where the quantity demanded and quantity supplied are equal.

A. In first part, we know that maximum that a producer willing to pay for supply of labor for agriculture is $12. This means he is not going to beyond this level. And here it is given that L=60 ,demand (w) =12 , w is the price. So when we plot all the points on graph with the help of function given we came to know that when price (w) =$12 ,quantity supplied is 60 and demand curve is $12 .That shows market equilibrium point that is point E in graph. However if l =60 is not given then to be with the help of given data we can easily find its value.

B. In part b, we need to find producer surplus which is nothing but supplier surplus. Here it can be interpreted as - $12 is the maximum amount which a supplier Is willing to pay but when he pays less than the actual amount which he otherwise pay, the difference is said to be surplus for him. And up-to the level of equilibrium only he is able to earn surplus. That means after that level like at point G and h in graph, he will gave to pay extra or may be he incurred some loss. Producer always want to sell more when price are high but here he always prefer to pay less price and more supply so that quantity traded will be higher. In the given graph you can also see demand curve as demand curve w=$12 is given and demand curve always moves downward and supply curve always move upward. L=quantity traded, p=price which producer pays.