Excess Demand and Deficient Demand – CBSE Notes for Class 12 Macro Economics

 Deficient Demand :-

              The term ' deficient demand ' refers to a the situation in which the aggregate demand in the economy is less than the aggregate supply of goods and services at full employment. In other words, it is the difference between the required level of aggregate demand at full employment and the current aggregate demand. Deficient demand is also known as deflationary gap.

This,

Deficient Demand = Aggregate demand at full employment - current aggregate demand.

Causes of deficient demand :-

          Deficient demand may be caused by the following factors -

a. Decrease in consumption and investment expenditure -

       Consumption and investment expenditure being major components of aggregate demand, any decrease in such expenditure generally reduces the level of aggregate demand.

b. Credit contraction -

             The policy of credit contraction by the central bank of the country results in a fall in the money supply in the economy, which in turn leads to reduction in the level of aggregate demand.

c. Decrease in government expenditure -

                  A fall in government expenditure in the economy leads to generation of less income and hence aggregate demand falls.

d.  Rise in taxes -

              Increase in the tax rates by the government leads to fall in disposable income, raises the price of goods and services and as such, the aggregate demand falls.

e. Falls in export demand - 

                 A fall in export demand due to higher domestic prices also brings about a fall in the level of aggregate demand.

Effects of deficient demand:

          The effect or consequence of deficient demand in the economy are as follows -

(a) Effect on General Price Level: 

            Deficient demand brings about a fall in the general price level in the economy due to the fact that in such situation the  aggregate demand is less than aggregate supply at full employment level. There is deflation in an economy showing deflationary gap.

(b) Effect on Employment: 

               Due to deficient demand, investment level is reduced, which in turn causes involuntary unemployment in the economy due to fall in the planned output or planned supply chain in the economy 

(c) Effect on Output: 

                        Low level of investment and employment leads to low level of output in the economy 

Excess Demand:-

              The term ' excess demand ' refers to the situation under which the current aggregate demand is more than the aggregate demand that is required to achieve full employment of resources. In this case, where the current aggregate demand is more than the aggregate demand that is required to achieve full employment of resources, there exists a gap between aggregate demand and aggregate supply which is known as the " inflationary gap ".

Thus, 

Excess Demand = Planned Expenditure 

                                - Full Employment Output

                               

                              = AD - AS

Causes of Excess Demand :-

                     The causes of excess demand are given below 

a. Increase in private investment due to the increase in credit facilities 

b. Increase in household consumption demand due to rise in propensity to consume.

c. Increase in public or government expenditure on goods and services.

d. Increase in export demand due to lower domestic prices.

e. Increase in money supply or increase in disposable income.

f. Increase in disposable income due to the fall in tax rates.

Effects of Excess Demand :-

                   The effects or consequences of excess demand are given below

(a) Effect on General Price Level:

                        Excess demand leads to a rise in the general price level since the aggregate demand is more than aggregate supply at the full employment level. This results in inflationary pressure in the economy showing inflationary gap.

(b) Effect on Output: 

               Excess demand has no effect on the level of output since the economy is at full employment level and there is no idle capacity in the economy. Therefore, excess demand does not lead to increase in the level of real income or output.

(c) Effect on Employment:

                        There will be no change in the. level of employment as the economy is already operating at full employment equilibrium, and hence, there is no unemployment.