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Economic surplus is a business term that is used to describe several different situations. The basic definition of economic surplus is that the financial assets of an entity, such as a market, business, government, or individual, exceed its financial liabilities. This basic definition however, is only a jumping-off point for describing the many forms of economic surplus.
For an individual, economic surplus can be described in a few ways. If a person has a certain amount of money to live on at the beginning of the month, yet does not spend it all during the month, his or her budget is in surplus by the remaining amount. However, surplus may also be used to describe the difference between what an individual or consumer is willing to pay for something, versus what is actually paid. If a person is willing to buy a couch for $800 US dollars (USD), but finds the same model for $600 USD, the economic surplus is said to be the $200 USD not spent that the consumer was willing to spend.
In business, surplus can also be a means of explaining a company's net worth and level of success. Over a given time, if a company's earnings exceed all expenditures, including labor, production costs, transportation, and investment losses, the amount remaining is economic surplus. This number also defines how profitable a company has been over a period of time. If a company's receipts equal one million dollars, and total expenditure equals $500,000 USD, the remaining $500,000 USD is considered profit or, in other words, surplus.
In finance, however, terms like surplus typically have far more complicated applications. For instance, in a basic supply and demand chart, there can be several different types of economic surplus involved. In addition to the consumer surplus, the amount of producer surplus must also be considered. This number is reached by the excess of profits over operating costs for the supplier.
Government economic surplus occurs when the amount of money a government makes through taxes, tariffs, and other means, exceeds the amount it spends on governmental programs, such as the military, public works, salaries, and implementing policy. Naturally, governmental taxes take a chunk out of both consumer and producer surplus. Ideally, a region reaches total or social surplus when consumers have enough profit to keep producers profitable, while the taxes imposed on both keep the government in surplus or balance but are not high enough to place businesses or individuals in deficit. This equilibrium, while ideal, rarely occurs.
For us businesses, having an economic surplus regularly or having a deficit regularly says a lot about how the business is doing and what it's future is going to look like.
I know that when my small business started out, I took extra care with my calculations and always accounted for the payments I have to make beforehand so I know whether or not I'm going to close that period with a surplus. When I saw that I was making a steady profit, I knew I was going to make it.
A lot of businesses go bankrupt in the beginning and one way you can tell is if couple of years into the opening of the business, there is no surplus whatsoever. This period can be even shorter for some businesses, depending how they started out.
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