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Excess Demand

It refers to a situation where

Aggregate Demands is more than Aggregate Supply

at full employment level

 

Normally

AD=AS at equilibrium Level

 

Excess Demand

AD > AS at equilibrium Lebel

What is Excess Demand - Teachoo.JPG

Note

Excess Demand leads to inflationary gap

Inflationary gap is a situation where

Actual Aggregate Demand exceeds Aggregate Supply

at full employment level

 

Graph Presentation

On X Axis, we represent Income or Output

On Y Axis, we show Demand

It can be seen that

AS Curve is Positively Sloping starting from Origin making an angle of 45 degree with x axis

AD Curve is also starting from Point C

Both AD and AS Curve intersect at Point E which is the equilibrium Point

Now, due to excess demand AD Curve shifts upwards to AD'

This leads to creation of Inflationary Gap (Represented by EF)

How to Show AD,AS and Equilibrium Point on Graph - Teachoo.JPG

How to Show Excess Demand on Graph - Teachoo.JPG

What is Inflationary Gap?

It is the gap between

AD AND AS

at

at full employment level

 

Effect of inflationary Gap/Excess Demand

It leads to Increase in General Price level in an economy

This is because Aggregate Demand increases but Aggregate Supply remains constant

What is Inflationary Gap - Teachoo.JPG

NCERT Questions

No questions in this part

Other Books

Question 1

Does the situation of excess demand arise?

How do you measure it?

Show it with the help of a diagram.

View Answer

 

Question 2

Explain deflationary gap

View Answer

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Transcript

What is Excess Demand Excess demand Extra Aggregate Demand It refers to a situation where AD is more than AS at Full Employment Level Normal Case AD = AS at Full Employment Level Excess Demand AD > AS at Full Employment Level How to Show AD,AS and Equilibrium Point on Graph? Normal Case Normally AD and AS Curve intersect at Point E which is Equilibrium Point How to Show Excess Demand on Graph? Due to excess Demand AD Curve shifts upwards to AD' intersect AS at Point F This leads to creation of Inflationary Gap (Represented by EG) What is Inflationary Gap Inflationary Gap Causes Increase in Prices Gap between AD and AS at Full Employment level Inflationary gap is a situation Where Actual Aggregate Demand exceeds Aggregate Supply at full employment level It leads to Increase in General price level of Economy

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CA Maninder Singh is a Chartered Accountant for the past 12 years. He also provides Accounts Tax GST Training in Delhi, Kerala and online.