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Class 12 Macro Economics Notes · CBSE

Excess Demand

9.1 Excess Demand — understand when aggregate demand exceeds aggregate supply at full employment, creating inflationary pressure. CBSE Class 12 Macroeconomics notes with diagrams and causes.

Last updated: 22 Aug 2026

Notes

Understanding Excess Demand

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

Inflationary Gap: An inflationary gap is the gap by which actual aggregate demand exceeds the aggregate demand required to establish full employment equilibrium. It is called inflationary because this leads to a rise in the general price level.

Excess Demand and Inflationary Gap

EF
Key Insight: Due to an increase in investment expenditure (ΔI), aggregate demand rises from AD to AD1. The gap between them (EF) is the inflationary gap. The larger the gap, the greater the inflationary pressure on the economy.

Causes of Excess Demand

Excess demand arises when any of the four components of aggregate demand (Consumption, Investment, Government Spending, Net Exports) increase.

Impact of Excess Demand

Effect on Output

Excess demand does not affect output because the economy is already at full employment level. There is no idle capacity to increase production.

Effect on Employment

No change in employment — the economy is already at full employment equilibrium with no involuntary unemployment.

Effect on Price Level

Excess demand causes inflation — a sustained rise in the general price level, since more money chases the same goods.

Excess demand is not a desired situation because it does not lead to any increase in the level of aggregate supply — the economy is already at the full employment level. The only result is rising prices.

Key Takeaways

Key Takeaways

  • Excess demand occurs when AD exceeds AS at the full employment level of output.
  • It creates an inflationary gap (EF), which leads to a rise in the general price level.
  • The main causes are increased consumption, investment, government spending, exports, and deficit financing.
  • Excess demand does not increase output or employment — the economy is already at full capacity.
  • The only effect is inflation — more money chases the same quantity of goods.
  • Festival season shopping surges in India (Diwali, wedding season) often trigger temporary excess demand in specific sectors.