Surplus

Definition

Surplus refers to the amount by which the quantity supplied of a good or service exceeds the quantity demanded at a given price. It represents a situation where there is an excess of supply over demand in the market.

5 Must Know Facts For Your Next Test

1. Surplus occurs when the supply of a good or service exceeds the demand at the current market price.
2. Surplus leads to downward pressure on prices as producers compete to sell their excess inventory.
3. Producers may respond to a surplus by reducing output, offering discounts, or finding alternative markets.
4. Consumers may benefit from a surplus as it can lead to lower prices and more availability of the good or service.
5. The presence of a surplus indicates that the market is not in equilibrium, and adjustments in price and quantity will occur to restore equilibrium.

Review Questions

• Explain how a surplus can arise in a market and the effects it has on equilibrium price and quantity.
  • A surplus can arise in a market when the quantity supplied of a good or service exceeds the quantity demanded at the current market price. This can happen due to a shift in the supply curve to the right, causing an increase in quantity supplied, or a shift in the demand curve to the left, causing a decrease in quantity demanded. The presence of a surplus puts downward pressure on the equilibrium price, as producers compete to sell their excess inventory. This adjustment in price will continue until the market reaches a new equilibrium where the quantity supplied equals the quantity demanded.
• Describe the four-step process for analyzing changes in equilibrium price and quantity, and how a surplus would impact this process.
  • The four-step process for analyzing changes in equilibrium price and quantity involves: 1) Identifying the initial equilibrium price and quantity, 2) Determining the direction of the shift in either the supply or demand curve, 3) Calculating the new equilibrium price and quantity, and 4) Comparing the new equilibrium to the initial equilibrium. In the case of a surplus, the process would involve a rightward shift in the supply curve, leading to a decrease in the equilibrium price and an increase in the equilibrium quantity. Producers would then need to adjust their output or pricing strategies to clear the surplus and restore equilibrium in the market.
• Analyze how the implementation of a price ceiling or price floor can create a surplus in a market, and explain the effects on consumer and producer welfare.
  • The introduction of a price ceiling, which sets a maximum legal price below the equilibrium price, can create a surplus in the market. This is because the quantity supplied will exceed the quantity demanded at the artificially low price set by the price ceiling. The surplus will lead to downward pressure on prices as producers compete to sell their excess inventory, potentially benefiting consumers through lower prices. However, the price ceiling also reduces producer surplus, as they are unable to sell their goods at the higher equilibrium price. Conversely, a price floor, which sets a minimum legal price above the equilibrium price, can also create a surplus by incentivizing producers to supply more than consumers are willing to purchase at the artificially high price. In this case, the surplus harms consumer welfare through higher prices, while producers benefit from the higher prices.

Related terms

Equilibrium: The point at which the quantity supplied and the quantity demanded are equal, resulting in a market clearing price.

Demand Curve: A graphical representation of the relationship between the price of a good or service and the quantity demanded.

Supply Curve: A graphical representation of the relationship between the price of a good or service and the quantity supplied.