Economic surplus

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This page deals with the various forms of economic surplus, including producer, consumer, government, and social/total surplus. For information about a budget surplus, see budget deficit.

Image:Economic-surpluses.svg The term surplus is used in economics for several related quantities. The consumer surplus is the amount that consumers benefit by being able to purchase a product for a price that is less than they would be willing to pay. The producer surplus is the amount that producers benefit by selling at a market price that is higher than they would be willing to sell for. Note that producer surplus flows through to the owners of the factors of production, unlike economic profit which is zero under perfect competition. If the markets for factors are perfectly competitive as well, producer surplus ultimately ends up as economic rent to the owners of scarce inputs such as land.

1 Details
2 Argument
3 See also
4 References
5 Further reading

[edit] Details

On a standard supply and demand diagram, consumer surplus shows up as a triangle above the price and below the demand curve, since intramarginal consumers are paying less for the item than the maximum that they would pay.

Producer surplus shows up as a triangle below the price and above the supply curve, since that is the minimum that a producer can produce that quantity with.

If the government intervenes, using, for example, a tax or a subsidy, then the graph of supply and demand becomes more complicated and will also include an area that represents government surplus.

Combined, the consumer surplus, the producer surplus, and the government surplus (if present) make up the social surplus or the total surplus. Total surplus is the primary measure used in Welfare Economics to evaluate the efficiency of a proposed policy.

A basic technique of bargaining for both parties is to pretend that their surplus is less than it really is: sellers may argue that the price they asks hardly leaves them any profit, while customers may play down how eager they are to have the article.

In national accounts, operating surplus is roughly equal to distributed and undistributed pre-tax profit income, net of depreciation.

In heterodox economics, the economic surplus denotes the total income which the ruling class derives from its ownership of scarce factors of production, which is either reinvested or spent on consumption.

In Marxian economics, the term surplus may also refer to surplus value and surplus labour.

[edit] Argument

Economics is usually defined as the problem of how best to distribute limited resources, limited because wants are characterised as unlimited. Surplus economics argues that rather than limited resources, there is an abundance of resources and this is the economic problem. The difference is one of perspective. If wants are the focus, then of course resources are limited, but if needs or essentials are used as the foundation, then resources are seen to be abundant. The difference is between a description and an explanation. A focus on wants describes a free market situation, a focus on essentials allows an explanation of the economy to begin.

An abundance of resources means that not all need to work productively and that some can use more resources than others. Who shall be the lucky ones and how to keep the unlucky quiet is part of the economic problem. Abundance is also a problem because having more resources than is strictly needed to live presents a danger to the production processes and the command over resources that created an economic surplus in the first place.

Surplus economics seeks to answer such questions as: Why does so much waste exist along side of so much poverty?

The orthodox assumption of scarcity has survived even the staggering levels of surplus of modern economies because this assumption suits the needs of those who command resources and who prefer to ensure that the economy does not become democratised; that unpleasant tasks are done by someone else, that some win and many lose.

[edit] See also

[edit] References

Monopoly capital: an essay on the American economic and social order, Paul A. Baran and Paul M. Sweezy
The Economic surplus in advanced economies, John B. Davis (Ed)
The economic surplus and neo-Marxism, Ron J. Stanfield

[edit] Further reading

Henry George, Progress and Poverty [1]

Topics in microeconomics
Scarcity • Opportunity cost • Supply and demand • Elasticity • Economic surplus • Economic shortage • Aggregation of individual demand to total, or market, demand • Consumer theory • Production, costs, and pricing • Market form • Welfare economics • Market failure