Economic surplus refers to two quantities that are related in mainstream economics. These are consumer surplus and producer surplus. Consumer surplus is used in reference to monetary gain that consumers obtain due to their ability to buy products for prices that are lower than highest prices that they would pay for the same products. On the other hand, producer surplus refers to the amount that the producers benefit from by selling products at a higher price than they would consider the least price that they would sell the products.
It is important to note that the producer surplus flows generally via the factors of production owners. Thus, in a perfect competition market, individual firms do not benefit from producer surplus.
This implies that the economic profit goes to zero. In real-world, businesses control or own some inputs. This means that producer surplus is received by these businesses. This is called normal profit and it is usually a part of the opportunity cost of a firm.
If market factors are effectively competitive, producer surplus will end up being economic rent for the owners of a scarce input. Scarce inputs include land. In some heterodox economics schools, economic surplus is used to denote the total income that is derived from the scarce factors of production ownership by the ruling class.
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This income is either spent through consumption or reinvented. Surplus may also be used in reference to surplus product, surplus labor and surplus value in Marxian economics.
Simply put, consumer surplus refers to the difference in the maximum price that a consumer is willing to spend on a product and the actual price that they pay for the product. If a consumer is willing to pay higher prices that the asking price, it follows that they will get more benefits from the product that they purchase than the amount that they spend in purchasing it.
For instance, drinking water has high consumer surplus. People tend to pay high prices in buying drinking water because they need the water to survive. The difference in price that a consumer would pay if required and the amount paid is the consumer surplus. Note that, first liters of water have very high utility because it prevents death. As such, the first liters of the drinking water have high consumer surplus than the subsequent liters.
Economic surplus concept was introduced by Paul A. Baran. The concept was aimed at dealing with the novel complexities that monopoly capital dominance raised.
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