Excess Demand & Deficit Demand

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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

Refer

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Youtube Video Tutorial on Excess Demand and Deficit Demand

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