Our Business Studies Notes
Part A – Principles and Functions of Management
Part B – Business Finance and Marketing
Detailed Explanation of Excess Demand and Deficient Demand
Macro Economics – Class 12
1. Introduction
In macroeconomics, equilibrium is achieved when Aggregate Demand (AD) equals Aggregate Supply (AS). However, economies often face situations where this balance is disturbed. These situations are known as Excess Demand and Deficient Demand.
Both concepts help us understand problems like inflation and deflation and the role of government policies in correcting them.
2. Excess Demand
Meaning of Excess Demand
Excess Demand refers to a situation where aggregate demand exceeds aggregate supply at the full employment level of income.
Excess Demand = Aggregate Demand – Aggregate Supply (at full employment)
In this situation, the economy cannot increase output further because resources are already fully employed.
Causes of Excess Demand
Excess demand may arise due to:
Increase in government expenditure
Increase in private consumption
Increase in investment demand
Increase in money supply
Decrease in taxes
Increase in exports (in an open economy)
Effects of Excess Demand
Inflationary Pressure: Prices start rising as demand exceeds supply
Rise in General Price Level
Reduction in Purchasing Power of Money
Inequality in income distribution
Diagrammatic Explanation of Excess Demand
The full employment level of income is fixed
Aggregate Demand curve shifts upward
The vertical gap between AD and AS represents excess demand
Measures to Correct Excess Demand
The government uses contractionary fiscal and monetary policies:
Fiscal Measures:
Reduction in government expenditure
Increase in taxes
Monetary Measures:
Increase in bank rate
Increase in repo rate
Increase in cash reserve ratio (CRR)
Open market sale of securities
3. Deficient Demand
Meaning of Deficient Demand
Deficient Demand refers to a situation where aggregate demand is less than aggregate supply at the full employment level of income.
Deficient Demand = Aggregate Supply – Aggregate Demand (at full employment)
This leads to underutilisation of resources and unemployment.
Causes of Deficient Demand
Deficient demand may arise due to:
Decrease in consumption expenditure
Decrease in investment demand
Decrease in government expenditure
Increase in taxes
Decrease in money supply
Decrease in exports
Effects of Deficient Demand
Deflationary Pressure: Fall in general price level
Increase in unemployment
Decline in output and income
Economic slowdown
Diagrammatic Explanation of Deficient Demand
Full employment level of income remains fixed
Aggregate Demand curve shifts downward
The gap between AS and AD represents deficient demand
Measures to Correct Deficient Demand
The government adopts expansionary fiscal and monetary policies:
Fiscal Measures:
Increase in government expenditure
Reduction in taxes
Monetary Measures:
Reduction in bank rate
Reduction in repo rate
Decrease in CRR
Open market purchase of securities
4. Excess Demand vs Deficient Demand (Comparison)
| Basis | Excess Demand | Deficient Demand |
|---|---|---|
| Meaning | AD > AS | AD < AS |
| Main Problem | Inflation | Deflation |
| Employment | Full employment | Unemployment |
| Price Level | Rises | Falls |
| Policy Used | Contractionary | Expansionary |
5. Importance for Class 12 Exams
Frequently asked as 4-mark and 6-mark questions
Diagrams carry high weightage
Helps in understanding inflation and deflation
Linked with government fiscal and monetary policy
6. Conclusion
Excess demand and deficient demand explain deviations from equilibrium in an economy. Excess demand leads to inflationary pressure, while deficient demand causes deflation and unemployment. Government intervention through fiscal and monetary measures is essential to restore equilibrium.
End of Notes