Question

Explain consequences of deficient demand.

Answer 1

The consequences of deficient demand are:

1. A fall in income, output, and employment occurs when aggregate demand is less than aggregate supply, resulting in underutilization of resources.
2. Increase in unemployment due to reduced production and demand for labor.
3. Decline in prices due to excess supply, leading to deflation or a “deflationary gap”.
4. The economy operates below full employment equilibrium, causing underemployment.
5. The extent of these effects depends on market structure, elasticity of factor supply, and strength of trade unions.
6. Deficient demand points to a shortfall in components of aggregate demand like consumption, investment, government expenditure, or money supply.