Problems of Deficient and Excess Demand and Their Corrective Measures – Class 12 Economics

⚖️ Problems of Deficient and Excess Demand and Their Corrective Measures – Class 12 Economics

Ever noticed how sometimes there’s too little demand for goods, and businesses struggle to sell — while at other times, prices shoot up because everyone’s buying more than what’s available?
These are two sides of the same coin in economics — Deficient Demand and Excess Demand.

Let’s break this down simply and clearly.

💡 Meaning of Aggregate Demand (AD)

Before we understand the two problems, let’s quickly recall what Aggregate Demand means.

Aggregate Demand = The total demand for all goods and services in an economy during a given period.

It includes:
👉 Consumption (C)
👉 Investment (I)
👉 Government expenditure (G)
👉 Net exports (X – M)

So, AD = C + I + G + (X – M)

When AD doesn’t match the economy’s full employment level of output, problems arise — either deficient or excess demand.

📉 Deficient Demand

🔎 Meaning:

Deficient demand occurs when aggregate demand is less than the aggregate supply at the full employment level.
In simple words — people are not spending enough, businesses don’t sell enough, and production slows down.

💥 Causes of Deficient Demand:

1. Decrease in consumer spending (due to low income or savings)
2. Decrease in investment (due to low business confidence)
3. Fall in government expenditure
4. Decrease in exports
5. Increase in taxes (reduces disposable income)

⚠️ Effects of Deficient Demand:

• Fall in output and employment
• Recession in the economy
• Deflationary pressure (prices fall)
• Wastage of resources
• Low profit and business closures

💊 Measures to Correct Deficient Demand (Deflationary Gap):

The government and central bank use expansionary policies to increase demand.

🏛️ 1. Fiscal Measures (by Government):

• Increase government spending on infrastructure, education, etc.
• Reduce taxes so people have more disposable income.
• Increase transfer payments like pensions, subsidies, and scholarships.

💵 2. Monetary Measures (by Central Bank):

• Reduce the bank rate → cheaper loans for businesses.
• Lower Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) → banks can lend more.
• Buy government securities (OMO) → increases money supply.

🧠 Goal: Encourage spending, raise investment, and bring the economy back to full employment.

📈 Excess Demand

🔎 Meaning:

Excess demand occurs when aggregate demand exceeds aggregate supply at full employment level.
It means people are spending too much, but there aren’t enough goods and services available.

💥 Causes of Excess Demand:

1. Increase in consumer spending (higher income or optimism)
2. Increase in investment (due to low interest rates)
3. Rise in government expenditure
4. Increase in exports
5. Decrease in taxes (leaves people with more money)

⚠️ Effects of Excess Demand:

• Inflation (rise in prices)
• Over-utilization of resources
• Trade deficits (imports rise)
• Mal-distribution of income (rich get richer)
• Boom conditions that can lead to economic instability

💊 Measures to Correct Excess Demand (Inflationary Gap):

The government and central bank use contractionary policies to reduce demand.

🏛️ 1. Fiscal Measures (by Government):

• Reduce government spending
• Increase taxes to reduce disposable income
• Reduce transfer payments

💵 2. Monetary Measures (by Central Bank):

• Increase bank rate → loans become expensive
• Raise CRR and SLR → banks lend less
• Sell government securities (OMO) → reduces money in circulation

🧠 Goal: Control inflation and bring demand back to sustainable levels.

⚖️ Comparison: Deficient vs Excess Demand

🧠 Conclusion

Both deficient demand and excess demand are harmful to the economy — one causes unemployment, the other brings inflation.
That’s why governments and central banks constantly try to maintain a balance using fiscal and monetary tools.

In short — too little demand slows growth, and too much overheats the economy.
The key is to keep Aggregate Demand = Aggregate Supply at the full employment level.

✍️ Quick Recap