Economic surplus

Likewise, in the supply-demand diagram, producer surplus is the area below the equilibrium price but above the supply curve.

Early writers of economic issues used surplus as a means to draw conclusions about the relationship between production and necessities.

This means that excess food production must overflow to other people, and will not be rationally hoarded.

William Petty[4] used a broad definition of necessities, leading him to focus on employment issues surrounding surplus.

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.

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.

Typically these prices are decreasing; they are given by the individual demand curve, which must be generated by a rational consumer who maximizes utility subject to a budget constraint.

With multiple price and/or income changes, however, consumer surplus cannot be used to approximate economic welfare because it is not single-valued anymore.

More modern methods are developed later to estimate the welfare effect of price changes using consumer surplus.

This aggregation can be represented graphically, as shown in the above graph of the market demand and supply curves.

For more general demand and supply functions, these areas are not triangles but can still be found using integral calculus.

[6] When supply of a good expands, the price falls (assuming the demand curve is downward sloping) and consumer surplus increases.

Producer surplus is usually expressed by the area below the market price line and above the supply curve.

In Figure 1, the shaded areas below the price line and above the supply curve between production zero and maximum output Q1 indicate producer surplus.

Because the rectangle OP1EQ1 is the total revenue actually obtained by the manufacturer, that is, A + B, and the trapezoid OPMEQ.

This part of the excess income reflects the increase in the benefits obtained by the manufacturers through market exchange.

Producer surplus is usually used to measure the economic welfare obtained by the manufacturer in the market supply.