The term surplus is used in economics for several related quantities. Surplus inventory is inventory not need in production or extra items left over from production.The consumer(customer) surplus is the amount that customers benefit by being able to purchase a products for a price that is less than they would normally be willing to pay. Producer surplus is the amount that producers benefit by selling at a price that is higher than they would normally sell for. 

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On a standard supply and demand scheme, customer surplus (CS) is the triangular area above the price and below the demand curve, since customers are paying less for the item than they would pay. Producer surplus (PS) is the  area below the price and above the supply curve, since that is the minimum quantity a producer can produce.

The government intervenes sometimes by implementing, for example, a tax or a subsidy. The graph of supply and demand becomes more complicated and also includes an area that represents government surplus.

Combined, the consumer surplus, the producer surplus, and the government surplus make up the total surplus. Total surplus is the primary measure used in economics(welfare) to evaluate the efficiency of a proposal.

A basic technique of bargaining for both parties is to pretend that their surplus is less than it really is: sellers may argue that the price they ask hardly leaves them any profit, while customers may play down how much they are willing to pay.

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Consumer Surplus

Consumer surplus is known as the difference between the price consumers are willing to pay and the actual price. For example, a company is willing to pay a tremendous amount for circuit since he needs it to manufacture, however since there are competing suppliers of this circuit he is able to purchase it for less than he is willing to pay. The difference between the two prices is the consumer surplus.

Distribution of benefits when price falls

When supply of a good expands, the price falls (assuming the demand curve is downward sloping) and consumer surplus increases. This benefits two groups of people. Consumers who were already willing to buy at the initial price benefit from a price reduction, and additional consumers who were unwilling to buy at the initial price but will buy at the new price and also receive some consumer surplus.

Consider an example of linear supply and demand curves. For an initial supply curve S₀, consumer surplus is the triangle above the line formed by price P₀ to the demand line (bounded on the left by the price axis and on the top by the demand line). If supply expands from S₀ to S₁, the consumers' surplus expands to the triangle above P₁ and below the demand line (still bounded by the price axis). The change in consumer's surplus is difference in area between the two triangles, and that is the consumer welfare associated with expansion of supply.

Some people were willing to pay the higher price P₀. When the price is reduced, their benefit is the area in the rectangle formed on the top by P₀, on the bottom by P₁, on the left by the price axis and on the right by line extending vertically upwards from Q₀.

The second set of beneficiaries are new consumers, those who will pay the new lower price (P₁) but not the higher price (P₀). Their additional consumption makes up the difference between Q₁ and Q₀. Their consumer surplus is the triangle formed by on the left by the line extending vertically upwards from Q₀, on the right by the demand line, and on the bottom by the line extending horizontally to the right from P₁.

Rule of one-half

The rule of one-half estimates the change in surplus for small changes in supply with a constant demand curve. Following the figure above,

where:

• CS = Consumers' Surplus

• Q₀ and Q₁ are the quantity demanded before and after a change in supply

• P₀ and P₁ are the prices before and after a change in supply