05 Jul Economic Surplus
What is an Economic Surplus?
Definition: The term economic surplus refers to the sum of producer surplus and consumer surplus. It is the gain that producers and consumers make when they sell or buy products. Economic surplus is also known as “total welfare” or Marshallian surplus.
What does Economic Surplus mean?
To understand the term economic surplus, it is important to first grasp the meaning of two other terms; producer surplus and consumer surplus.
Producer surplus: If a producer of a good is willing to sell each unit at $100, but receives $120 instead, the difference is the producer surplus. So, if the producer sells 100 units at $120 each, the total producer surplus is $2,000. ($20 X 100).
Consumer surplus: This term’s meaning is similar to that of the definition of producer surplus. But it is the surplus from the viewpoint of a consumer.
If a consumer is willing to pay a maximum price of $150 for a good but can buy it for $120 instead, the consumer surplus is $30.
The two surpluses taken together add up to the economic surplus.
Example of Economic Surplus
Stacey Hurn, the proprietor of Pedilux, a shoe store, buys flip-flops from a supplier at $10 a pair. She is willing to sell each pair at a minimum of $15.
In June, Stacy sells 40 pairs of flip-flops at $25 each. Her producer surplus is $10 per pair ($25 – $15), and the total producer surplus is:
$10 X 40 = $400
Let us assume that each customer who bought the flip-flops was willing to pay a maximum of $30. This means that the consumer surplus per pair is $5 ($30 – $25) and the total consumer surplus is:
$5 X 40 = $200
Hence, the economic surplus is:
$400 + $200 = $600
Economic surplus is the total of the producer surplus and the consumer surplus.