(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 324

CHAPTER 8 • Profit Maximization and Competitive Supply 299

Price
(dollars per
unit of
output)

MC
AVC

F IGURE 8.11

Producer
Surplus
A

B

D

0

P

C

q*

PRODUCER SURPLUS FOR A FIRM
The producer surplus for a firm is measured by the
yellow area below the market price and above the

marginal cost curve, between outputs 0 and q*, the
profit-maximizing output. Alternatively, it is equal
to rectangle ABCD because the sum of all marginal costs up to q* is equal to the variable costs of
producing q*.

Output

Figure 8.11 illustrates short-run producer surplus for a firm. The profit-maximizing output is q*, where P ϭ MC. The surplus that the producer obtains from
selling each unit is the difference between the price and the marginal cost of producing the unit. The producer surplus is then the sum of these “unit surpluses”
over all units that the firm produces. It is given by the yellow area under the
firm’s horizontal demand curve and above its marginal cost curve, from zero
output to the profit-maximizing output q*.
When we add the marginal cost of producing each level of output from 0 to
q*, we find that the sum is the total variable cost of producing q*. Marginal cost
reflects increments to cost associated with increases in output; because fixed cost
does not vary with output, the sum of all marginal costs must equal the sum of
the firm’s variable costs.6 Thus producer surplus can alternatively be defined
as the difference between the firm’s revenue and its total variable cost. In Figure 8.11,
producer surplus is also given by the rectangle ABCD, which equals revenue
(0ABq*) minus variable cost (0DCq*).
PRODUCER SURPLUS VERSUS PROFIT Producer surplus is closely related to
profit but is not equal to it. In the short run, producer surplus is equal to revenue
minus variable cost, which is variable profit. Total profit, on the other hand, is
equal to revenue minus all costs, both variable and fixed:
Producer surplus = PS = R - VC
Profit = p = R - VC - FC
It follows that in the short run, when fixed cost is positive, producer surplus is
greater than profit.
The extent to which firms enjoy producer surplus depends on their costs of production. Higher-cost firms have less producer surplus and lower-cost firms have more.
By adding up the producer surpluses of all firms, we can determine the producer

The area under the marginal cost curve from 0 to q* is TC(q*) − TC(0) ϭ TC − FC ϭ VC.

6