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
- Effect on output
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
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