Definition: Surplus is when a company has more resources or assets than it can use in production. In other words, it’s when a business’ assets exceed the useful demand for them.
This concept often refers to excess production capacity, but it is also used in the budgeting process when income exceeds expenses.
What Does Economic Surplus Mean?
In economic terms, consumers and producers have the opportunity to have a surplus. Consumers’ surplus is the difference between the highest monetary amount that the consumer would have paid minus the actual amount paid for the desired good or service. Vice versa, a producers’ surplus is the difference between the lowest monetary amount they would accept for a good or service and the actual amount paid by a consumer.
Let’s look at an example.
Martha had been waiting for the newest line of high heels to come out that have amazing reviews for comfortability and style. She’s heard so much about them and knows how quickly they sell out. Over the last few months, she’s saved a small amount of her paycheck and put it aside for her new shoes. She resolves that she will spend up to $100.00 per pair of shoe. When she arrives at the store, she is thrilled to find out each pair is only $55.00. Leaving the store with shoes in hand, she now has a consumers’ surplus of $45 in her budget.
One the other hand, the company produces these shoes at a cost of $15.00 all expenses included, the lowest they would accept for each shoe would be $30.00 but in response to the demand, they raised the price to $45.00, for each pair sold the company had a producers’ surplus of $15.00.
Surpluses often occur because the strategies used to determine quantity and price are imperfect causing over-estimates. These estimates can have negative and positive outcomes.
A budget surplus is positive because income exceeds expenses and the company is profitable. From a manufacturing standpoint, production surpluses mean that extra money and labor was used to produce goods that exceeded demand. In other words, the company produced more inventory than demand required. Now it might have to offer the products at reduced prices or sit on them for a while.