What is Excess Demand and it's related concept

 We know that Equilibrium level of income and employment is determined when AD curves intersects the AS curve. If the equilibrium level exceeds the full employment level, then there is Excess Demand in the economy. However if Equilibrium level falls short of full employment level, then it is a situation of Deficient Demand. 

According to Keynes :-  The Equilibrium level of employment may or may not be the full employment level. It means Equilibrium level may exceed or fall short of full employment level.

What is Excess Demand?

Excess demand refers to the situation when aggregate demand is more than the aggregate supply corresponding to full employment level of output in the economy.  It is the excess of anticipated expenditure over the value of full employment output .

What is Inflationary Gap?

Inflationary Gap refers to the gap by which actual aggregate demand exceeds the aggregate demand required to establish full employment Equilibrium. Excess demand gives rise to an inflationary gap.

Graph of Excess Demand:- 

What are the reasons for Excess Demand?

Excess demand may arise due to several factors. Important factors are mentioned below:- 

• Rise in the Propensity to consume:-  Excess Demand may arise because of increase in consumption expenditure due to rise in the Propensity to consume or fall in propensity to save.

• Reduction in taxes:-   It may also occur due to increase in disposable income and consumption demand because of decrease in taxes .

• Increase in Government Expenditure:-  Rise in government demand for goods and services due to increase in public expenditure will also result in excess demand.

• Increase in Investment:-  Excess demand can also arise when there is increase in Investment due to decrease in rate of interest in expected returns.

• Fall in Imports :-  Decrease in Imports due to higher international prices in comparison to domestic prices may also lead to excess demand.

• Deficit Financing:-  Excess Demand may be caused due to increase in the money supply caused by deficit Financing.

Impact of Excess Demand:- 

Excess demand is not a desired situation because it doesn't lead to any increase in level of aggregate supply as the economy is already at full employment level. Excess demand has the following effect on output, Employment and general price level :- 

• Effect on output:-  Excess demand does not affect the level of output because economy is already at full employment level there is no idle capacity in the economy.

• Effect on Employment:-  There will be no change in the level of employment as the economy is already operating at full employment equilibrium and there is no involuntary unemployment.

• Effect on General price level:-  Excess demand leads to rise in the general price level as aggregate demand is more than aggregate supply. 

What is a Deficient Demand?

Deficient demand refers to the situation when aggregate demand is less than the aggregate supply corresponding to full employment level of output in the economy.

What is a Deflationary Gap?

Deflationary gap is the gap by which actual aggregate demand falls short of aggregate demand required to establish full employment equilibrium.

The situation of deficient demand arise when planned aggregate expenditure falls short of aggregate supply at the Full employment level. It gives rise to Deflationary gap.

Graph of Deficient Demand :- 

What are the reasons of deficient demand?

The reasons for occurrence of deficit demand are almost opposit  to the reasons for excess demand. The main causes for deficient demand are:- 

• Decrease in propensity to consume:-  A decrease in consumption expenditure, due to fall in the propensity to consume leads to deficient demand in the economy.

• Increase in taxes:-  aggregate demand may also fall due to imposition of higher taxes. It leads to decrease in disposable income and as a result the economy suffers from deficient demand.

• Decrease in government expenditure:-  When government reduces its demand for goods and services due to fall in public expenditure, it leads to deficient demand.

• Fall in investment expenditure:-  Increase in the rate of interest or fall in the expected returns lead to decrease in the investment expenditure. It reduces the aggregate demand and gives rise to deficient demand.

• Rise in Import:-   When international prices are comparatively less than the domestic prices, then it may  lead to a rise in imports, implying a cut in the aggregate demand.

• Fall in exports:-  Exports may fall due to comparatively higher prices of domestic goods due to increase in the exchange rate for domestic currency. This will lead to Deficient demand.

Impact of Deficient Demand:- 

Deficient demand creates many difficulties in the economy due to its deflationary nature. Generally deficient demand adversely affected the level of output, employment and the price level in the economy.

• Effect on output:-  Due to lack of sufficient aggregate demand there will be an increase in inventory stock. It will force the forms to plan for lesser production for the subsequences period. As a result, planned output will fall.

• Effect on employment:-  Deficient demand causes involuntary unemployment in the economy due to fall in the planned output.

• Effect on general price level:-  Deficient demand causes the general prices to fall due to lack of demand for goods and services in the economy.

Difference between Excess demand and Deficient demand:-

Basis	Excess demand	Deficient Demand
Meaning	It refers to the situation when aggregate demand is more than aggregate supply corresponding to full employment level in the economy.	It refers to the situation when aggregate demand is less than aggregate supply corresponding to full employment level in the economy.
Equilibrium level	It indicates over full employment equilibrium.	It indicates under employment equilibrium.
Reasons	It occurs due to Excess of anticipated expenditure that is due to rise in consumption expenditure, investment expenditure etc.	It occurs due to shortage of anticipated expenditure that is due to fall in consumption expenditure, investment expenditure etc.
Impact on output and employment	It does not affect the output and the employment as economy is already operating at full employment level.	it leads to fall in output and employment due to shortage of aggregate demand.

Conclusion:-. It is clear from the discussion that both the situations of excess demand and deficient demand are harmful for the growth of the economy.