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

Youtube Video Tutorial on Excess Demand and Deficit Demand

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