Surplus

Definition

A surplus refers to the amount of a good or service that exceeds the current demand or need for it. In the context of microeconomics, a surplus can occur when the quantity supplied of a product is greater than the quantity demanded at the current market price.

5 Must Know Facts For Your Next Test

1. A surplus occurs when the market price is above the equilibrium price, leading to a quantity supplied that exceeds the quantity demanded.
2. Surpluses can lead to a decrease in market price as suppliers compete to sell their excess inventory, eventually reaching the equilibrium price.
3. Governments may sometimes intervene in markets with surpluses by implementing price floors or purchasing the excess supply to support producers.
4. Businesses may respond to a surplus by reducing production, offering discounts, or finding new markets to sell their excess inventory.
5. Consumers may benefit from a surplus as it can lead to lower prices and increased availability of the product.

Review Questions

• Explain how a surplus affects the equilibrium price and quantity in a market.
  • When a surplus exists, the quantity supplied exceeds the quantity demanded at the current market price. This causes a downward pressure on the price, as suppliers compete to sell their excess inventory. The price will continue to decrease until it reaches the equilibrium price, where the quantity supplied and quantity demanded are equal. At the equilibrium price, the surplus is eliminated, and the market is in a state of balance.
• Describe the potential government and business responses to a market surplus.
  • Governments may intervene in a market with a surplus by implementing price floors, which set a minimum price that suppliers can charge. This helps to support producers and prevent the price from falling too low. Alternatively, the government may choose to purchase the excess supply directly, effectively removing it from the market. Businesses, on the other hand, may respond to a surplus by reducing production, offering discounts or sales to consumers, or exploring new markets to sell their excess inventory. The goal for businesses is to find ways to reduce the surplus and maintain profitability.
• Analyze the potential impact of a surplus on consumers in a market.
  • For consumers, a surplus can be beneficial as it can lead to lower prices and increased availability of the product. When there is a surplus, suppliers are competing to sell their excess inventory, which puts downward pressure on prices. This allows consumers to purchase the product at a lower cost. Additionally, the increased availability of the product can make it more accessible to a wider range of consumers. However, it's important to note that the long-term impact of a surplus on consumers depends on how the market adjusts and whether the lower prices and increased availability are sustainable.

Related terms

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

Demand Curve: A graphical representation of the relationship between the price of a good and the quantity demanded of that good, with quantity demanded inversely related to price.

Supply Curve: A graphical representation of the relationship between the price of a good and the quantity supplied of that good, with quantity supplied directly related to price.