How many forms does the supply and demand curve have?

More than a dozen Figures 7-4 draw the supply curve corresponding to this supply schedule. Note that the height of the supply curve is related to sellers' costs. At any quantity, the price given by the supply curve represents the cost to the marginal seller, the seller who would be the first to leave the market if the price were slightly lower. For example, when the number of houses is 4, the high of the supply curve is $900, which is the cost to Mary (the marginal seller) of providing her painting services. At three houses, the high of the supply curve is $800, which is the cost to Georgia (now the marginal seller) to provide her painting services.

Since the supply curve reflects sellers’ costs, we can use it to measure producer surplus. Figure 7-5 uses the supply curve to calculate producer surplus in our example. In panel (a), we assume the price is $600. In this case, the quantity supplied is 1. Note that the area below the price and above the supply curve is equal to $100. This amount is exactly the producer surplus of Gramma that we calculated previously.

Panel (b) of Figure 7-5 shows the producer surplus when the price is $800. In this case, the area below the price and above the supply curve is equal to the total area of ??the two rectangles. This area equals $500, the producer surplus we previously calculated for Georgia and Granma when there are two houses that need painting. The conclusion drawn from this example applies to all supply curves: the area below the price and above the supply curve measures market producer surplus. The logic is straightforward: the high of the supply curve measures sellers' costs, and the difference between price and production costs is each seller's producer surplus. Therefore, total area is the sum of producer surplus for all sellers.