Problem of deficient and
excess demand
Deficient Demand
Deficient demand refers to a situation
wherein aggregate demand in the
economy falls short of aggregate supply of
goods and services at full employment. As
a result, resources of the economy remain
partly utilised indicating under-
employment. As a result, resources of the
economy remain partly utilised indicating
under-employment.
Reasons for Deficient demand:
Fall in household consumption demand due to decreased propensity to consume.
Fall in private investment demand because of lesser provision and availability of credit
facilities.
Reduced public (government) expenditure.
Fall in demand for exports.
Fall in supply of money
Fall in disposable income.
Impact of Deficient demand on:
General Price Level: General price level falls as when aggregate demand is less than
aggregate supply at a full employment level, there is a situation of deflation in the economy
Output: Low output levels, due to unemployment, and reduced investment.
Employment: Low employment levels, as there will be a case of involuntary unemployment.
Fall in the Investment expenditure,
AD falls from AD AD1 to AD 2.
Equilibrium point shifts from a to b
The difference between the two is
the Deflationary Gap
Deflationary gap is the situation of
low output implying low income
and low employment
