Surplus

What is Surplus?

• Surplus is the marginal social benefit of either producers or consumers.

Consumer Surplus

• Consumer surplus is the extra satisfaction or utility gained by consumers from paying a price that is lower than that which they are prepared to pay.
• On a graph it can be seen as the upper half of the triangle made by the supply and demand curves and the axis for price.

Producer Surplus

• Producer surplus is the excess of the actual earnings that a producer makes from a given quantity of output, over and above the amount the producer would be prepared to output.
• On a graph it can be seen as the lower half of the triangle made by the supply and demand curves and the axis for price.

Total Surplus

• Total surplus, also called community or social surplus, is the sum of producer surplus and consumer surplus.
• On a graph it is the area of the triangle made by the supply and demand curves and the axis for price.

Allocative Efficiency

• Allocative efficiency is the ideal combination of goods and services in a society.
• The market is socially efficient with no external influences and no external affects.
• In a free-market, the market will naturally correct itself to have allocative efficiency.

• Optimum allocation = optimum distribution of resources.
• Results in the maximum possible community surplus (CS + PS) at equilibrium (Qs = Qd).

Failure of Allocative Efficiency

• Failure to reach allocative efficiency results in a welfare loss.
• Not producing where Qs = Qd, meaning that there is a surplus loss.
• Allocative efficiency always occurs when there is government intervention.