Surplus: Definition, Types, Causes, and Consequences

Surplus is a term that you often find in economic or financial activities. This expression is generally used to describe a situation where the amount of income generated is greater than the costs incurred. However, it turns out that the meaning of surplus is broader.

Definition of Surplus

Simply put, there is a surplus when the amount of assets exceeds the total amount invested. That the term surplus can mean income, profits, capital, commodities, and other assets.

In the context of a budget, a surplus occurs when revenues exceed expenses. Budget surpluses can arise in government when tax revenues persist after all programs have been financed.

Surplus does not always mean positive. When there is an oversupply of products, it is dangerous. However, in the context of a proposed budget, surplus means profit.

A surplus is different from a deficit, meaning that expenditure is greater than income. Deficits can also arise because imports exceed exports or assets exceed liabilities.

Deficits usually lead to negative economic cycles. However, it should be noted that operating with a deficit does not mean you will face financial difficulties. Deficits can be created to maximize future earnings.

However, a deficit that lasts too long can reduce the value of a company's stock or even deplete it. That's why news about deficits always gets a negative response, not a surplus.

Surplus Types

From an economic point of view, surplus is divided into two types, consumer surplus and producer surplus.

1. Consumer Surplus

From the consumer's point of view, surplus is the difference in value up to the maximum amount a consumer can pay for a given product over the price of the product itself. More simply, you can pay Rp. 350.000 for a bag of rice, even though the price of rice is only Rp. 300.000 per bag.

So you as a buyer or consumer get an additional Rp. 50.000. Consumer surplus can therefore be defined as a condition in which a consumer pays a price that is lower than the price he is willing to pay.

2. Producer Surplus

Just as consumer surplus benefits consumers, producer surplus offers sellers or producers the same. In addition, producer surplus can also be defined as a higher selling price received by sellers compared to the actual price or initial price.

For example, your company wants to sell the latest series of smartphones with prices starting at IDR 5,5 million. But it turns out that the product is selling well in the market at a price of IDR 7,5 million. In other words, you as a cellphone seller get a profit or surplus of up to IDR 2 million for every smartphone product you sell.

In fact, the surplus in the financial sector is slightly different from the general perception of surplus. An example is financial surplus, which focuses on measuring the budget to evaluate the amount of revenue generated against the amount spent.

In addition, costs or budget surpluses can arise for private individuals, companies, and public administrations. This condition indicates that the parties spend less money on purchases compared to the income and earnings during a certain period.

Causes of Surplus Occurrence

1. Sudden Changes in Demand

An example is at the height of the COVID-19 pandemic. Producers experience a surplus due to high demand for health facilities, internet services, and the need for internet data packages.

2. Role of Government

The extent of the government's role is reflected in China's power to control the global market. Chinese companies have been quick to ramp up production, while other manufacturers have generally been slower to respond to market demand.

3. Market Penetration

Some companies choose mass market penetration to flood the market with their products. This strategy can bring big profits, but if it fails it can result in the market becoming saturated and not wanting to buy similar products.

The Impact of a Surplus

As previously explained, the real surplus is not always positive. Excess can have negative implications associated with poorly distributed supplies.

Under these circumstances, the impact is:

1. Possible Lack of Inefficiencies in Commodity Distribution

Inefficiencies can arise with excess product. Goods and services are not distributed based on consumer preferences. Under these conditions, producers can reduce supply and direct it to areas with higher demand.

2. Opportunity to Save Items

Featured items can be beneficial if the manufacturer can stockpile the product for the future. For example, agricultural grain products that have a shelf life of several years. Farmers can use these supplies when crops are poor and prices are going down.

3. Price reduction

This condition occurs when the product is easily found in the market. Prices may drop according to consumers. However, caution should be exercised when falling prices start to hurt producers. Before losing money, you should immediately reduce stock.

Well, that's a complete explanation of the surplus. Easy to understand right? Hope it helps, huh!