The area representing producer surplus is measured in dollars. Producer surplus can be interpreted as the amount of revenue allocated to fixed costs and profit in the industry. This is because the market supply curve corresponds to industry marginal costs. Recall that firms choose output in a perfectly competitive market by setting price equal to marginal cost. Thus marginal cost is equal to the price P in the Figure at industry output equal to Q .
Marginal cost represents the addition to cost for each additional unit of output.
As such it represents additional variable cost for each additional unit of output. This is represented as the sum of the blue and yellow areas in the diagram. This area is the same as producer surplus as defined above. Since fixed factors of production represents capital equipment that must be installed by the owners of the firms before any output can be produced, it is reasonable to use producer surplus to measure the well-being of the owners of the firms in the industry. Changes in Producer Surplus Suppose the demand for a good rises, represented as a rightward shift in the demand curve from D to D' in the adjoining diagram.