Graph 1

The red triangle in the above graph represents producer surplus. Producer surplus exists when the price goods are sold for is greater than what it costs the firms to manufacture those goods. Producer surplus is defined by the area above the supply curve, below the price, and left of the quantity sold.

Graph 2

The yellow triangle in the above graph represents consumer surplus. Consumer surplus exists when the price paid by a consumer is less than what the consumer would be willing to purchase the good for. Consumer surplus is defined by the area below the demand curve, above the price, and left of the quantity bought.

Graph 3

Graph 3 combines producer surplus and consumer surplus into one graph.

Graph 4

Graph 4 shows the areas of producer surplus and consumer surplus with a downward sloping demand curve. The equilibrium price and quantity is at the point were marginal cost (MC) is equal to the demand curve (also marginal revenue – MR). In a competitive market, Demand=AR=MR=P. The competitive output is the efficient output for the market.

Graph 5

The monopolist produces where marginal cost equals marginal revenue. The monopolist quantity is found by going from the point where MC=MR to the x-axis, and the monopolist price is found by going from the point where MC=MR up to the demand curve and then over to the y-axis. The monopolist quantity is less than the competitive quantity and the monopolist price is greater than the competitive price. In a monopolistic market, consumer surplus is show by the yellow triangle, which is the area below the demand curve, above the monopolist price, and left of the monopolist quantity. The producer surplus is now the red area, which is the quantity above the marginal cost curve (also supply curve), below the monopolist price, and left of the monopolist quantity.

Graph 6

When a market does not produce at its efficient point there is a deadweight loss to society. The yellow triangle represents the lost consumer surplus and the red triangle represents the lost producer surplus when the market operates at the monopolistic output instead of the competitive output. The lost consumer surplus plus the lost producer surplus is the total deadweight loss to society.

Graph 7

The blue rectangle is the amount transferred to the monopolist from the consumers. By operating at the monopolist output, the monopolist captures some consumer surplus. Since the monopolist gains the blue rectangle, it is not part of the deadweight loss to society. Although the monopolist lost some producer surplus (red area in graph 6), the transfer to him (blue rectangle) is greater than the loss, therefore, he ends up better off.