Economic surplus
In mainstream economics, economic surplus, also known as total welfare or total social welfare or Marshallian surplus (after Alfred Marshall), is either of two related quantities:
This article is about consumers' and producers' surplus. For information about other surpluses, see Surplus.The sum of consumer and producer surplus is sometimes known as social surplus or total surplus; a decrease in that total from inefficiencies is called deadweight loss.[3]
Overview[edit]
In the mid-19th century, engineer Jules Dupuit first propounded the concept of economic surplus, but it was the economist Alfred Marshall who gave the concept its fame in the field of economics.
On a standard supply and demand diagram, consumer surplus is the area (triangular if the supply and demand curves are linear) above the equilibrium price of the good and below the demand curve. This reflects the fact that consumers would have been willing to buy a single unit of the good at a price higher than the equilibrium price, a second unit at a price below that but still above the equilibrium price, etc., yet they in fact pay just the equilibrium price for each unit they buy.
Likewise, in the supply-demand diagram, producer surplus is the area below the equilibrium price but above the supply curve. This reflects the fact that producers would have been willing to supply the first unit at a price lower than the equilibrium price, the second unit at a price above that but still below the equilibrium price, etc., yet they in fact receive the equilibrium price for all the units they sell.
History[edit]
Early writers of economic issues used surplus as a means to draw conclusions about the relationship between production and necessities. In the agricultural sector surplus was an important concept because this sector has the responsibility to feed everyone plus itself. Food is notable because people only need a specific amount of food and can only consume a limited amount. This means that excess food production must overflow to other people, and will not be rationally hoarded. The non-agricultural sector is therefore limited by the agricultural sector equaling the output of food subtracting the amount consumed by the agricultural sector.
William Petty[4] used a broad definition of necessities, leading him to focus on employment issues surrounding surplus. Petty explains a hypothetical example in which there is a territory of 1000 men and 100 of those men are capable of producing enough food for all 1000 men. The question becomes, what will the rest of the men do if only 100 are needed to provide necessities? He thereby suggests a variety of employments with some remaining unemployed.[5]
David Hume approached the agricultural surplus concept from another direction. Hume recognized that agriculture may feed more than those who cultivate it, but questioned why farmers would work to produce more than they need. Forceful production, which may occur under a feudal system, would be unlikely to generate a notable surplus in his opinion. Yet, if they could purchase luxuries and other goods beyond their necessities, they would become incentivized to produce and sell a surplus. Hume did not see this concept as abstract theory, he stated it as a fact when discussing how England developed after the introduction of foreign luxuries in his History of England.[4]
Adam Smith's thoughts on surplus drew on Hume. Smith noted that the desire for luxuries is infinite compared to the finite capacity of hunger. Smith saw the development in Europe as originating from landlords placing more importance on luxury spending rather than political power.[4]