Excess Demand and Deficient Demand
Read the passage carefully and answer the following questions:
The equilibrium output in the economy determines the level of employment, given the quantity of other factors of production. This means that the level of output determined by equality of income with aggregate demand does not necessarily mean the level of output at which everyone is employed.
Full employment level of income is that level of income where all the factors of production are fully employed in the production process. Equilibrium only means that, if left to itself, the level of income in the economy will not change even when there is unemployment in the economy. The equilibrium level of output may be more or less than the full employment level of output. If it is less than the full employment of output, it is due to the fact that demand is not enough to employ all factors of production. This situation is called the situation of deficient demand. It leads to a decline in prices in the long run. On the other hand, if the equilibrium level of output is more than the full employment level, it is due to the fact that the demand is more than the level of output produced at full employment level. This situation is called the situation of excess demand. It leads to a rise in prices in the long run.
If the potential output of an economy (the maximum output the economy is capable of producing at full employment level) exceeds the actual output, this situation will be called?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Deficient demand.
Equilibrium only means that output equals aggregate demand; it does not mean that every factor of production is employed. If people demand less than the economy can produce with all its factors at work, firms produce only that much, and output settles below the full employment level. Because demand is not enough to employ all the factors, this is the situation of deficient demand.
Potential output, the most the economy can produce at full employment, is the full employment level of output, and actual output is the equilibrium output. So potential output exceeding actual output is the same case: equilibrium output below full employment.
Left to itself the economy can stay there with unemployment; in the long run deficient demand leads to a decline in prices.
Why the other options are incorrect
Option (1) Excess demand. — Incorrect. Excess demand is the opposite case: equilibrium output is more than the full employment level, because demand is more than the output that can be produced at full employment, and it leads to a rise in prices.
Option (2) Effective demand. — Incorrect. Effective demand is the level of aggregate demand at which the economy is in equilibrium, whatever its relation to full employment; it does not name a shortfall.
Option (4) Break even demand. — Incorrect. There is no such term.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 21-05 S2* 23-05 S2 24-05 S1* | 13-05 S1* 22-05 S1* 27-05 S2* 28-05 S2* | – | – | 15-07 S2* |
* A similar question.