Figure 8.10 Producer Surplus for a Firm in Perfect Competition
(a) At market price, a perfectly competitive firm produces Q*. For each unit the firm produces below Q*, the marginal cost MC is less than the market price, and the firm earns a producer surplus on that unit. As a result, total producer surplus is equal to the area below the demand curve and above MC.
(b) Producer surplus can also be calculated by a firm’s total revenue minus its variable cost. A firm’s total revenue is the entire rectangle with height P and length Q*, and its variable cost is the rectangle with height AVC* and length Q*. Its producer surplus, therefore, is the area of the rectangle with height (P – AVC*) and length Q*.
(b) Producer surplus can also be calculated by a firm’s total revenue minus its variable cost. A firm’s total revenue is the entire rectangle with height P and length Q*, and its variable cost is the rectangle with height AVC* and length Q*. Its producer surplus, therefore, is the area of the rectangle with height (P – AVC*) and length Q*.