Reviewed by Aug 27, 2020| Updated on
What is meant by Surplus?
A surplus defines the sum of an asset or resource over the portion that is actively used. It may refer to a host of different things like sales, income, resources, and products. It defines the items of inventories that remain unused, unbought, on store shelves.
A surplus arises in financial situations when the income received exceeds the expenses charged. A budget surplus can be found within governments when there's tax revenue remaining after all government programs are fully funded.
A surplus is not inherently preferable. For instance, a supplier who projects more potential demand for a given product may generate too many unsold units. It can ultimately lead to financial losses quarterly or annually. As inventory spoils and products perishable, a surplus of these commodities such as grains may cause a permanent loss.
All about the Surplus in the Economy
Economic surplus may be of two types as given below:
It occurs when the price of a good or service is below the maximum price the customer will happily pay. Think of an auction where a buyer has a price cap in his mind which he won't surpass for a specific painting he fancies. A market surplus occurs when this buyer eventually buys the artwork for less than its predetermined cap.
A product surplus occurs when products are sold at a price higher than that at which the manufacturer was willing to sell. In the same auction sense, if an auction house sets the opening bid at the lowest price, it will sell a painting comfortably. A seller surplus arises if buyers establish a bidding war, allowing the piece to sell at a higher price, well above the minimum opening price.
Causes and Effects of Surplus
A surplus happens when there is some sort of disconnection between supply and demand for a commodity, or when certain people are willing to pay more than others for a commodity. If there were a fixed price for a specific popular product that all were uniformly required and able to pay, there would be no surplus or shortage.
But that never occurs in practice, as there are different price levels for different individuals and companies — both when purchasing and selling. Sellers are actively competing with other suppliers to at best value transfer as much inventory as possible. If demand for the product increases, the vendor offering the lowest price can run out of stock, which tends to lead to general price increases on the market, causing a producer surplus.
Surplus creates market imbalances in a product's supply and demand. The imbalance means the product can't move through the market efficiently. Luckily the surplus and shortage process has a way to balance itself out. Often, the government will step in and impose a price floor or set a minimum price at which a product has to be priced, to fix the imbalance. It also contributes to higher price tags than customers were paying, thereby benefiting the companies.