If the market price decreases, which of the following best describes the effect on producer surplus?

• A. Producer surplus increases.
• B. Producer surplus decreases.
• C. Producer surplus remains the same.
• D. Producer surplus becomes negative.

Answer: (B)

Producer surplus is the extra amount producers earn over the minimum they’d accept to produce each unit, so the total PS is the area above the supply curve and below the market price for the quantity sold. When the market price falls, the revenue producers get per unit drops, so the gap between price and their costs shrinks. That reduces the surplus earned on each unit and, because some less-profitable production may be cut, the total producer surplus falls as well. So the best description is that producer surplus decreases.

If the price drops a lot, production can shrink to zero for some firms, pushing PS toward zero, but it wouldn’t typically become negative in standard analysis since firms can stop producing rather than incur losses on every unit.