The term surplus is commonly used in economic fields, to refer to the excess amounts of something. The surplus has its origin after the development of agriculture and livestock, at which time more food begins to be produced than is consumed by humans. These surplus or surplus quantities begin to be used as a bargaining chip in barter.
Usually in the use of the term surplus, reference is made to the surpluses of production. Those quantities that are left over when consumption has been covered. Therefore, we can define the word surplus as the difference between the quantity produced and the quantity consumed. That resulting quantity is what we know as surplus. Based on this we can classify two types of surplus.
Types of surplus
In relation to the given definition, we can classify surpluses into consumer surpluses and production surpluses. Both concepts depend on and are highly related to supply and demand in the market.
- Consumer Surplus: Through supply and demand prices are set in the market. Consumer surplus occurs when a consumer purchases a good or product below the price they would be willing to pay for it. The difference between that price you would be willing to pay and the amount actually paid is the consumer surplus.
- Producer Surplus: The producer surplus is generated in the difference between the price it has cost to produce a product and the price to which it is acquired in the market. The manufacturing surplus in economic terms is equal to the selling price less the manufacturing cost. In other words, the manufacturing surplus is the gross profit of a product.