I would like to say, I disagree with your explanation and parts of your diagram. Firstly, your diagram should look more like this: Firstly, I forgot to put in lost revenue (rather than profit, as you stated - it's a bit of a misnomer). This isn't actually the case. In a normal economy, a surplus in supply leads to lower prices. Why? Because people do not demand that much supply, and at a higher price nobody is willing to buy the produce (it almost could be like the cobweb theorem effect - the supplier predicting how much the consumer demands and ending up supplying too much). Therefore they have to supply at price P2, purely because consumers wouldn't buy it otherwise - it's like a method of drumming up demand for their good and selling more of it. This temporarily makes the supply curve perfectly inelastic, until a new equilibrium is reached. I also think you need a few ceteris paribus' scattered about - just for consistency since you haven't accounted for unexpected events, such as a sudden love for bounty hunter (like that would ever happen :XD: ) but you get my drift. Someone can obviously correct me on the finer points if I'm wrong (I'm only doing an A-level in economics after all, I might not be right).