Deficit Demand

Deficit Demand

It refers to a situation where

Aggregate Demands is less than Aggregate Supply

at full employment level

Normally

AD=AS at equilibrium Level

Deficit Demand

AD < AS at equilibrium Level

Note

Deficit Demand leads to Deflationary gap

Deflationary gap is a situation where

Actual Aggregate Demand is less than 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 deficit demand AD Curve shifts downwards to AD'

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

What is Deflationary Gap?

It is the gap between

Aggregate Demand at full employment level

and

Actual Aggregate Demand

Effect of Deflationary Gap/Deficient Demand

It leads to decrease in General Price level in an economy

This is because Aggregate Demand decreases but Aggregate Supply remains constant