Surplus

Definition

Surplus refers to the situation where the quantity supplied of a good or service exceeds the quantity demanded at a given price. This often occurs when prices are set above the equilibrium level, leading to excess supply in the market. Understanding surplus is essential for analyzing how supply and demand interact and how market inefficiencies can arise.

5 Must Know Facts For Your Next Test

1. Surpluses can lead to downward pressure on prices as suppliers attempt to clear excess inventory.
2. When a surplus occurs, producers may reduce production or lower prices to encourage sales.
3. A prolonged surplus can result in wasted resources if goods are perishable or cannot be stored effectively.
4. Government interventions, such as price floors, can intentionally create surpluses in certain markets, like agriculture.
5. Market adjustments typically occur over time as suppliers respond to changes in demand and adjust their output accordingly.

Review Questions

• How does a surplus affect market equilibrium and what are the typical adjustments that follow?
  • A surplus disrupts market equilibrium by creating an excess of goods that are not being sold. This leads suppliers to lower prices to encourage sales, which ultimately helps bring the market back toward equilibrium. Over time, suppliers may also reduce their production in response to decreased demand, contributing further to adjusting towards a balanced state.
• Discuss how government-imposed price floors can lead to surplus in certain markets and provide an example.
  • Government-imposed price floors set a minimum price above the equilibrium price, which often leads to surplus. For instance, in agricultural markets, when governments set a price floor for crops, farmers produce more than consumers are willing to buy at that higher price, resulting in unsold stock and wasted resources. This intervention is typically aimed at protecting farmers' incomes but can create inefficiencies in supply and demand.
• Evaluate the economic implications of persistent surpluses on market dynamics and consumer behavior.
  • Persistent surpluses can significantly alter market dynamics by signaling inefficiencies in production and consumer preferences. When consumers consistently see excess goods, they may adjust their expectations about pricing and quality, leading to diminished perceived value of those products. Additionally, prolonged surpluses can cause firms to reassess their strategies, potentially resulting in innovation or shifts toward different goods that better meet consumer needs. Over time, these effects can reshape entire markets and influence long-term economic stability.

Related terms

Equilibrium Price: The price at which the quantity supplied equals the quantity demanded, resulting in no surplus or shortage.

Shortage: A condition where the quantity demanded exceeds the quantity supplied at a given price, opposite to surplus.

Price Floor: A minimum price set by the government above the equilibrium price, often leading to surplus in the market.