EXCESS DEMAND & DEFICIT DEMAND
Excess Demand
Excess demand refers to the situation when aggregate demand (AD) is more than the
aggregate supply (AS) corresponding to full employment level of output in the economy.
It gives rise to inflationary gap.
It is gap by which actual aggregate demand exceeds the aggregate demand.
Larger the inflationary gap, greater the inflationary pressure on economy
Reasons for excess demand
Increase in main component of AD
Rise in propensity to consume
Increase in consumption
Increase in disposable income
Reduction in taxes leads increase in DI
Increase in Govt. exp.
Increase in public exp.
Increase in demand for goods and services by govt.
Increase in investment
Rise in credit facility
Increase in expected return
Decrease in ROI
Fall in imports
Due to high prices
Rise in exports
Due to lower price of domestic goods
Excess demand
Not desired situation
As it does not lead to any increase in level of AS as the economy is already at full employment
level
Impact of excess demand:
Causes rise in prices and increases in inequalities
Some others are:
Effect on output
Does not affect
Effect on employment
No change
Effect on general price level
Leads to rise in price level as demand is more than supply
Deficient Demand
Deficient demand refers to the situation when aggregate demand (AD) is less than the
aggregate supply (AS) corresponding to full employment level of output in the economy.
The situation of deficient demand arises when planned aggregate expenditure falls short of
aggregate supply at the full employment level.
It gives rise to deflationary gap. Deflationary gap is the gap by which actual aggregate
demand falls short of aggregate demand required to establish full employment equilibrium.
During deficient demand, equilibrium is determined at a level less than full employment
equilibrium. It leads to underemployment equilibrium.
Reasons for deficient demand:
Opposite to the excess demand
Decrease in propensity to consume
Decrease in consumption expenditure
Decrease in DI
Increase in taxes
Decrease in Govt. Exp.
Reduction in demand for goods by govt.
Fall in investment exp.
Increase in ROI
Fall in expected return
Rise in imports and fall in Imports
Impact of Deficit Demand
Effect on output
Increase in inventory stock
Less production, fall in planned output
Effect on employment
Causes involuntary employment due to fall in planned o/p
Price level
Fall due to lack of demand
