What is a Surplus?

A surplus is like cooking a huge meal and having leftovers…

When you cook a meal, you usually plan to cook enough for everyone who plans to sit down and eat it. If you cook too much, you’ll still have some left after everyone eats as much as they want. The remaining food is your surplus for the meal. You can package up and store the leftovers for later. You can also drop by your neighbor’s house and offer some of the surplus food to them.

A surplus is when you have more of something than you need or plan to use. For example, when you cook a meal, if you have food remaining after everyone has eaten, you have a surplus of food. You can choose to throw the food out, stockpile it, or try to find someone else, like a neighbor, who wants to eat the food.

An economic surplus is the total of consumer and producer surpluses in an economy. A consumer surplus is the difference between the maximum the consumer is willing to pay for a product and its market price. A producer surplus is the difference between the lowest price at which the producer is ready to sell a good and the actual amount the good sells for.

In the world of finance, surplus has a slightly different meaning. A financial surplus typically refers to a budget that predicts you will have more income than expenses. Companies, government, or individuals could have budget surpluses — indicating that they will spend less money than they make during a specific period.

One example of a surplus is the food leftover after a meal. When you cook for a large group, you might make more food than people can eat. The leftovers are a surplus of food. You can package and store the leftovers for future use, waste them by throwing them out, or bring them to a neighbor’s house and see if they want to eat some of your food.

An example of an economic surplus occurs when someone sells a product on an auction website. Typically, the person lists the item for the lowest price they’re willing to accept for the item. As people bid at higher prices, the seller may receive more money — above the minimum they’d agree to take. The difference between the final bid and the starting bid is their surplus for that sale.

Another example of a surplus is a budget surplus. If a government expects to bring in $10 billion in tax revenues, but only expects to spend $9.5 billion for the year, it has a projected $500 million budget surplus. It can choose to retain that surplus and stockpile it for the future, or it can increase its spending to make use of its extra resources.

Surpluses are not always a good thing. For example, suppose a factory produces 10,000 widgets but only manages to sell 8,000 to its customers. This leaves the factory with a surplus of 2,000 widgets. The factory has to store the surplus widgets, incurring inventory costs while it looks for buyers. Eventually, the factory might have to sell the widgets at a loss.

A budget surplus occurs whenever a person or business spends less money than it earns. An economic surplus occurs when supply and demand for a product fall out of equilibrium.

In an ideal market, consumer demand would exactly match production levels, and prices would adjust to these levels of supply and demand. In reality, markets don’t operate with perfect efficiency, leading to small or significant levels of disequilibrium in supply and demand.

For example, as the price of a product, such as computers, increases, businesses will want to produce more computers to sell because each device offers higher levels of profit. At the same time, increasing prices generally reduce consumer demand as fewer people are willing to pay a higher price for a computer. Producers will make more computers than people are ready to buy, creating a surplus.

Disequilibrium is frequently created or exacerbated by outside factors that affect the supply, demand, and price of goods, such as raw materials shortages, runs on certain types of products, taxes, and tariffs.

When an economic surplus occurs, it means that supply, demand, and prices are out of equilibrium. That means that something will likely change to create equilibrium.

In theory, if supply is greater than demand then prices will have to drop until consumer demand matches the level of supply offered. In turn, falling prices cause drops in production, reducing supply.

Eventually, price, supply, and demand reach equilibrium. In reality, there may be no perfect equilibrium due to outside factors like taxes or the costs of raw materials.

A budget surplus means that an organization has more money than it plans to spend. A budget surplus tends to be a good thing. It gives an organization more flexibility to increase its spending, allowing for investment or additional spending. The person, group, or government could also decide to save its surplus cash, letting it cover a budget deficit in the future.

An economic surplus is the total of both consumer surplus and producer surplus. Economic surplus is commonly called total welfare to indicate that it is accounting for both consumer and producer surpluses.

Consumer surplus is only a portion of the economic surplus calculation. It refers to the difference in the amount that a consumer is willing or prepared to pay for a product and the price the person actually pays.

Producer surplus only makes up one part of the economic surplus calculation because economic surplus (also called total welfare) accounts for both consumer and producer surpluses.

Producer surplus is the difference between the minimum price that a producer is willing to accept for something it sells and the price at which the product sells.

To find an economic surplus, you must first find the consumer and producer surplus in an economy.

To find the consumer surplus, you can use this formula:

Maximum price the consumer is willing to pay – the actual price paid = consumer surplus

To find the producer surplus, you can use this formula:

The actual cost of a product – the minimum amount the producer will accept = producer surplus

To find the total economic surplus, add the two together.

Consumer surplus + producer surplus = economic surplus

A shortage occurs when there is less of something than people want or need. A budget shortage (or deficit) would indicate that expenses are higher than income. An economic shortage means producers are creating fewer units of a product than consumers demand. That means that not everyone who wants to buy something will be able to make the purchase.

Another way of thinking about shortages is to consider a surplus of demand. There is more demand than there is supply to meet it.

One cause of shortages is when the price of a product drops. As the price decreases, more consumers will want to purchase a good. At the same time, lower prices mean lower potential profit for producers, causing businesses to make fewer units of the good.

Eventually, the increase in demand and reduction in supply will cause total demand to exceed total supply, creating a shortage.

In theory, shortages ultimately force the price of a good to increase. Producers can charge more for a good when it is scarce as the reduced demand for the product is offset by the increased revenue the higher price produces.

As prices rise, more producers will make the product, increasing supply until supply, demand, and price all reach equilibrium. The supply curve and demand curve can show how changes in price affect both and the equilibrium price for a product.