Definition: Economic surplus, also known as total welfare, is the sum of the consumer surplus and the producer surplus in an economy. In other words, it’s the benefit obtained by suppliers for selling a good or a service at a higher market price than they would be willing to sell and the benefit obtained by consumers for paying a lower price for a good or service than the price they would be willing to pay.
What Does Economic Surplus Mean?
What is the definition of economic surplus? Based on the general price level and consumer expectations, consumers are willing to pay a certain price for certain goods and services. If they manage to pay a lower price than the maximum price they would be willing to pay, they have a consumer surplus.
Similarly, producers are willing to sell their products or services at a certain price. If they manage to sell them at a higher price than the minimum price they would be willing to sell, they have a producer surplus. The sum of consumer surplus and producer surplus equals the economic surplus of an economy.
Let’s look at an example.
Ted wants to buy a computer, but he is not willing to pay more than $1,500. He visits a computer store. While browsing around, he sees a computer, which he thinks is ideal for his needs. Ted asks the salesperson some technical details about the computer, and he finds out that this particular model is on sale. The final price is $1,200, and Ted can have a 2-year guarantee, technical support, and a free antivirus program. So, Ted buys the computer for $1,200 although he was willing to pay a maximum price of $1,500. Ted has a consumer surplus of $300.
From the firm’s perspective, the minimum selling price for this computer was $800. Eventually, the firm sold the computer for $1,200. The firm has a producer surplus of $400.
The economic surplus of this transaction is $300 + $400 = $700.
Define Economic Surplus: An economic surplus is the sum of all consumer and producer surpluses in an economy.