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Definition of a Surplus:

A surplus occurs when the quantity of a good or service supplied exceeds the quantity demanded. Prices are above the equilibrium price.

Detailed Explanation:

A surplus occurs when the quantity demanded is less than the quantity supplied at a given price. There is a surplus of seats when there are empty seats at an event you attend. In retail stores, the excess supply becomes evident with mounting inventories. A “clearance” sale will probably follow to bring down the price and generate sales. Market forces will push the price down to equilibrium. 

On a supply and demand graph, this is evident by the difference between the quantity supplied and the quantity demanded, where the quantity supplied exceeds the quantity demanded because the price exceeds the equilibrium price. Producers are willing to supply more of a good or service than buyers are willing to purchase at a higher price. The graph below is the market for babysitters in Oak Grove. The equilibrium price is $7.00 per hour, and at that price 32,000 hours would be purchased. The number of hours demanded equals the number of hours supplied. A surplus of hours exists for all prices above $7.00. For example, sitters would be willing to provide 35,000 hours at $8 per hour, but parents would only be willing to purchase 27,000 hours, the resulting surplus would equal 8,000 hours. Some babysitters would cut their rate to get more business, and others might leave the business.  

Dig Deeper With These Free Lessons:

Supply and Demand – Producers and Consumers Reach Agreement
Supply and Demand – The Costs and Benefits of Price Controls
Changes in Demand – When Consumer Tastes Change
Changes in Supply – When Producer Costs Change

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