Excess and Deficient Demand
1 Quick Explanation 1–3 min
Excess demand: AD is above full-employment output → inflationary pressure.
Deficient demand: AD is below full-employment output → deflationary/unemployment pressure.
2 Detailed Notes
Definition
Full employment level
Full employment level of output (YF) is the maximum output the economy can produce with all available resources optimally employed. Compare actual AD to the AD that gives YF.
Definition
Definitions
- Excess demand: when AD is greater than the AD required at full employment output (AD > AD at YF). Demand for goods exceeds capacity → inflationary gap.
- Deficient demand: when AD is less than the AD required at full employment output → deflationary gap and involuntary unemployment.
Comparison
Causes
| Excess demand causes | Deficient demand causes |
|---|---|
| Rise in consumption/MPC | Fall in consumption/MPC |
| Increase in investment | Fall in investment |
| Increase in government spending | Fall in government spending |
| Increase in money supply | Tight money / high taxes |
Key idea
Consequences
- Excess demand: prices rise (inflation), real output can't rise, black marketing, distortion of saving.
- Deficient demand: output falls below capacity, unemployment rises, deflation, reduced investment.
Diagram
Diagram
Draw AD at full employment (ADF). Excess demand: AD curve ABOVE ADF — show the vertical gap (inflationary gap) at YF. Deficient demand: AD curve BELOW ADF — show the vertical gap (deflationary gap).
In One Minute
Excess demand = AD > full-employment AD → inflationary gap. Deficient demand = AD < full-employment AD → deflationary gap + unemployment. Gap measured vertically at YF.
Important for Exam
- ⭐ 1-mark: define excess demand.
- ⭐ 3-marks: causes & consequences.
- ⭐ 6-marks: diagram + policy correction.
- ⭐ Gap is the vertical distance at YF between AD and ADF.
Watch & Learn
Watch on YouTubeExcess Demand and Deficient Demand - Chapter 9 - Class 12 - One Shot
by Rajat Arora
Why watch? Causes, consequences and diagrams all in one.
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by Rajat Arora
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