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Difference between Excess Demand and Deficient Demand

Last Updated : 21 Jul, 2023
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Excess demand and deficit demand are the two situations of disequilibrium.

What is Excess Demand?

When demand is more than what is necessary to utilise resources fully, it is called Excess Demand. In simple terms, when planned aggregate expenditure is more than aggregate supply at full employment, excess demand arises. It creates an inflationary gap. The inflationary gap is the excess of actual aggregate demand over the aggregate demand necessary to maintain full employment equilibrium. In short, the country’s overall demand is in excess of what is necessary to keep it at full employment. An inflationary gap leads to a rise in the price level or inflation because full employment has already been achieved, hence output and income levels cannot be raised. 

What is Deficient Demand?

When demand is not sufficient to fully utilise resources, it is referred to as Deficient Demand. In simple terms, when planned aggregate expenditure is less than aggregate supply at full employment, the situation of deficient demand arises. It creates a deflationary gap. The deflationary gap is the difference between actual aggregate demand and the demand necessary to achieve full employment equilibrium. In short, the country’s overall demand is below what is necessary to keep it at full employment. A deflationary gap leads to a decline in the economy’s income, output, employment, and price level, driving the economy into a state of underemployment. Thus, deficit demand results in deflation.

Difference between Excess Demand and Deficient Demand

Basis

Excess Demand

Deficient Demand

Meaning Excess Demand refers to the situation when Aggregate Demand (AD) is in excess of Aggregate Supply (AS) corresponding to full employment in the economy, i.e., AD>AS. Deficient demand refers to the situation when Aggregate Demand (AD) is short of Aggregate Supply (AS) corresponding to full employment in the economy, i.e., AD<AS. 
Equilibrium Level Excess Demand indicated over full employment equilibrium. Deficient Demand indicated under full employment equilibrium.
Inflationary or Deflationary Gap Excess Demand leads to Inflationary Gap. Deficient Demand leads to Deflationary Gap.
Reason Excess Demand occurs because of the excess anticipated expenditure. It means that it happens due to a rise in the investment expenditure, consumption expenditure, etc. Deficient Demand occurs because of the shortage of anticipated expenditure. It means that it happens due to a fall in the investment expenditure, consumption expenditure, etc.
Impact on Price Excess Demand results in inflation; i.e., it leads to a rise in general price level. Deficient Demand results in deflation; i.e., it leads to a fall in general price level.
Impact on Output and Employment Excess Demand does not have any impact on the output and employment. It is because the economy is already operating at full employment level. Deficient Demand results in a fall in the output and employment. It happens because of the shortage of aggregate demand.

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