What Does Surplus Mean?

Today I saw this tweet by @timoreilly: From Amazon paper http://bit.ly/avoNpd: “The consumer surplus generated by niche books has increased at least five fold from 2000 to 2008.”  Without fully understanding that, I went to the article. I found myself still wondering what they meant by surplus. It seemed to be a technical term that meant more than just having extra books.

I thought about tweeting it, but having gotten limited response to my Twitter questions of late, I decided to search it on Google, which took me to Wikipedia. Surplus is when there is more supply than demand. But how does that benefit consumers, besides lower prices? And what does a five fold increase mean? I saw a link to Economic surplus, which then gave a unique definition for “consumer surplus.” It’s the amount that consumers benefit by being able to purchase a product for a price that is less than the most that they would be willing to pay. As it turns out, the law of supply and demand is actually measured in terms of consumer surplus and producer surplus.

Now it was starting to make sense. If a consumer would be willing to pay more than the current asking price, then they are getting more benefit from the purchased product than they spent to buy it. That benefit often translates into buying more products. So the place where I stumbled was thinking that the word I had misunderstood was, “surplus,” when in fact it was the phrase, “consumer surplus,” a technical term used in economics. But how does the Long Tail model of Amazon book sales translate to a consumer surplus? Oh, as it gets easier to sell niche books, there are more of them and they can be offered at a lower price than they used to be offered. Twenty years ago, I might have been willing to pay $120 for a rare book on collecting Victorian pottery. But now, when publishing is so much easier, I might well see it for $20. The Long Tail means more people are enjoying niche products, and Amazon can offer them cheaply.

Okay then. I’m glad we got that straightened out. Not sure what Long Tail is? Google it. In short it’s the idea that our old assumptions about the bad profit margins of niche products were wrong. Amazon now makes over 36% of its sales from niche books, from the Long Tail.