Surplus

Definition

A surplus refers to a situation where the quantity supplied of a good or service exceeds the quantity demanded at the current market price. It indicates a state of oversupply in the market, where producers are able to offer more of the product than consumers are willing to purchase.

5 Must Know Facts For Your Next Test

1. A surplus occurs when the supply of a good or service exceeds the demand for it at the current market price.
2. Surpluses can lead to a decrease in price as producers compete to sell their excess inventory.
3. Governments may intervene in markets experiencing a surplus by purchasing the excess goods or providing subsidies to producers.
4. Surpluses can also lead to the buildup of inventories, which can have implications for storage costs and future production decisions.
5. The presence of a surplus indicates that the market is not in equilibrium, and adjustments in price or quantity will be necessary to restore balance.

Review Questions

• Explain how a surplus relates to the concept of equilibrium in a market for goods and services.
  • A surplus indicates that the market is not in equilibrium, as the quantity supplied exceeds the quantity demanded at the current market price. This disequilibrium will lead to adjustments in the market, as producers compete to sell their excess inventory, causing the price to decrease. The market will continue to adjust until the quantity supplied and quantity demanded are equal, and the market reaches a new equilibrium point.
• Describe how shifts in demand and supply can lead to the creation of a surplus in a market.
  • Shifts in demand or supply can create a surplus in a market. For example, if there is an increase in supply without a corresponding increase in demand, the quantity supplied will exceed the quantity demanded at the current market price, resulting in a surplus. Alternatively, if there is a decrease in demand without a corresponding decrease in supply, the quantity supplied will again exceed the quantity demanded, leading to a surplus. In both cases, the market will need to adjust to restore equilibrium, either through a decrease in price or a reduction in quantity supplied.
• Analyze the role of government intervention in addressing a surplus in a market, and explain the potential implications of such intervention.
  • Governments may choose to intervene in markets experiencing a surplus, either by purchasing the excess goods or providing subsidies to producers. This intervention can help support producers and prevent a significant drop in prices. However, government intervention can also have unintended consequences, such as distorting market signals, creating inefficiencies, and potentially leading to long-term dependence on government support. Additionally, the costs of government intervention, such as storage and distribution of the excess goods, can be a burden on taxpayers. Ultimately, the decision to intervene in a surplus market requires careful consideration of the potential benefits and drawbacks.

Related terms

Demand: The quantity of a good or service that consumers are willing and able to purchase at various prices during a given time period.

Supply: The quantity of a good or service that producers are willing and able to offer for sale at various prices during a given time period.

Equilibrium: The state in a market where the quantity supplied is equal to the quantity demanded, and there is no tendency for prices or quantities to change.