Excess and Deficient Demand in Three-Sector Economy Last Updated : 06 Apr, 2023 Comments Improve Suggest changes Like Article Like Report Excess and Deficient Demand in Three-Sector Economy When demand is more than what is necessary to utilise resources fully, it is called Excess Demand. However, when demand is not sufficient to fully utilise resources, it is referred to as Deficient Demand. Excess Demand and Deficient Demand can occur in a three-sector economy (which includes households, firms, and government). In a three-sector economy, Aggregate Demand (AD) is the sum total of Consumption (C), Investment (I), and Government Expenditure (G). Because of the introduction of the government sector, the new AD1 curve; i.e., C+I+G lies above the old curve AD; i.e., C+I. To make things simple, it is assumed that government expenditure is constant because of which the new AD1 curve is parallel to the old AD curve, as the vertical distance between them is G. The effect of Government Expenditure can be shown with the help of the following graph: Note: Earlier, we discussed in excess demand and deficient demand that AD only includes Consumption and Investment. However, the inclusion of Government Expenditure does not have any impact on the nature or meaning of excess demand and deficient demand. Remedy for Excess Demand and Deficient Demand The government has taken different measures to correct the problem of excess and deficient demand in a three-sector economy. Remedy for Excess Demand The government can correct the problem of excess demand by reducing the aggregate demand by an amount, that is, equal to the inflationary gap. In the above graph, F is the equilibrium point that is attained when the AD curve intersects the AS curve. To correct the problem of the inflationary gap, the government uses its fiscal measure and reduces expenditure. A reduction in government expenditure will reduce aggregate demand and remove the inflationary gap. Therefore, when there is a reduction in the government expenditure by \Delta{G} the AD curve shifts downward to AD1. Now, the new aggregate demand level is AD1, which is sufficient enough to keep the economy at full employment equilibrium; i.e., point E. Remedy for Deficient Demand The government can correct the problem of deficient demand by increasing the aggregate demand by an amount that is equal to the deflationary gap. In the above graph, F is the equilibrium point that is attained when the AD curve intersects the AS curve. However, the equilibrium point here signifies the underemployment equilibrium level and EG is the resulting deflationary gap. So, to correct this deflationary gap, the government uses its fiscal measure and increases expenditure. When the government expenditure is increased, the new aggregate demand level is AD1 which corresponds to a higher level of government expenditure. The new AD curve; i.e., AD1 is sufficient enough to keep the economy at full employment equilibrium; i.e., point E. Comment More infoAdvertise with us Next Article What is Fiscal Policy and how it used to correct Excess Demand and Deficient Demand? N nupurjain3 Follow Improve Article Tags : Macroeconomics Commerce Commerce - 12th Similar Reads CBSE Class 12 Macroeconomics Notes Macroeconomics deals with the study of the national economy as a whole. In Class 11th notes, we covered the study of individuals through microeconomics, now we will learn about the whole economy through Macroeconomics. GeeksforGeeks has designed Notes for Class 12 Macroeconomics in a way that provid 6 min read Chapter 1: IntroductionIntroduction to MacroeconomicsMacroeconomics is a part of economics that focuses on how general economies, markets, or different systems that operate on a large scale behave. 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Let us derive saving c 2 min read Investment Function: Induced Investment, Autonomous Investment and Determinants of InvestmentWhat is Investment Function? A strategy or concept of economics that helps in identifying the connection between shifts in the investment patterns of people and other variable factors affecting investment in an economy is known as Investment Function. The expenditure incurred to create new capital a 4 min read Full Employment and Involuntary UnemploymentFull Employment and Involuntary Unemployment are two concepts that are closely related but have different meanings. Full Employment refers to a situation where all or nearly all individuals who are willing and able to work at the prevailing wage rates are employed. 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Keynes felt that an initial rise in investment multiplies overall inc 3 min read Short-run Fixed Price Analysis of Product MarketThe prices in the short run take some time to react to factors of excess supply or demand as producers seek to modify their production plans in the meantime. For instance, if there is an excess supply, firms plan to produce less in the next cycle to prevent inventory accumulation. In addition, an in 3 min read What is Excess Demand?According to Keynesian theory, an equilibrium income level might correspond to full employment, underemployment, or over employment of resources. Similarly, when the economy is not at full employment, there will be instances of surplus demand and deficit demand. Excess demand and deficit demand are 4 min read What is Deficient Demand?According to Keynesian theory, an equilibrium income level might correspond to full employment, underemployment, or over the employment of resources. 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However, when demand is not sufficient to fully utilise resources, it is refe 11 min read Excess and Deficient Demand in Three-Sector EconomyExcess and Deficient Demand in Three-Sector Economy When demand is more than what is necessary to utilise resources fully, it is called Excess Demand. However, when demand is not sufficient to fully utilise resources, it is referred to as Deficient Demand. Excess Demand and Deficient Demand can occu 3 min read What is Fiscal Policy and how it used to correct Excess Demand and Deficient Demand?Meaning of Fiscal Policy A fiscal policy is the policy of the central government which aims at controlling the situation of the money supply in the economy. 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A budgetary deficit happens when the government spends more money than what is generated through revenue collection, including direct o 5 min read Difference between Fiscal Deficit and Revenue DeficitA Budgetary Deficit can be termed as the excess of the total government expenditure over the total revenue generated in a financial year. A budgetary deficit happens when the government spends more money than what is generated through revenue collection, including direct or indirect taxes. Based on 2 min read Difference between Primary Deficit and Fiscal DeficitA Budgetary Deficit can be termed as the excess of the total government expenditure over the total revenue generated in a financial year. A budgetary deficit happens when the government spends more money than what is generated through revenue collection, including direct or indirect taxes. 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For this purpose, the currency of one country is converted into the currency of another country, and the rate 7 min read Flexible Exchange Rate System | Meaning, Merits and DemeritsA medium of exchange for goods and services is called currency, which is different from one country to another country. However, a country’s currency cannot be used in another country. For this purpose, the currency of one country is converted into the currency of another country, and the rate at wh 5 min read Managed Floating Exchange Rate System : Meaning, Objectives, Merits and DemeritsA medium of exchange for goods and services is called currency, which is different from one country to another country. However, a country’s currency cannot be used in another country. For this purpose, the currency of one country is converted into the currency of another country, and the rate at wh 5 min read Devaluation of Currency| Meaning, Reasons, Effects, Example and Critical EvaluationSometimes there arise some situations when the value of the domestic currency tends to increase drastically and faces monetary barriers. The government and the central bank intervene with some effective monetary policies for the correction of exchange rates, trade deficits, etc. One of these practic 5 min read Depreciation of Currency : Effects, Examples and Critical EvaluationWhat is Depreciation of Currency?Currency Depreciation refers to a decrease in the value of a currency as compared to other currencies in a floating exchange rate system. Market forces of demand and supply work towards the depreciation of the currency and determine a currency depreciation rate. The 5 min read Difference between Devaluation and DepreciationDevaluation and Depreciation are two examples of a situation when the value of domestic currency falls in terms of foreign currencies. Even though both include a reduction in the value of domestic currency, the way in which it happens is different. What is Devaluation? Devaluation means deliberately 2 min read Balance of Payment and its Components: Capital and Current AccountUsually, government records all the transactions that arise between a country and the outside world. This record is titled Balance of Payments. Balance of Payments can also be known as the Balance of International Payments. It is a statement of all transactions between entities in one country and th 9 min read Difference between Current Account and Capital Account of BoPBalance of Payment is a statement of all transactions between entities in one country and the outside world over a specified time period, such as a quarter or a year. It lists all interactions between residents of one country and residents of other countries that involve businesses, organizations, o 3 min read Difference between Balance of Payment and Balance of TradeBalance of Payment and Balance of Trade are two important terms that are sometimes confused as the same. The former is a statement of all transactions between entities in one country and the outside world over a specified time period; however, the latter is the difference between the Export and Impo 3 min read Balance of Payments: Surplus and Deficit, Autonomous and Accommodating Transactions, Errors and OmissionsA balance of payment (BoP) is a summary statement that lists all of the transactions that took place within a specific period between the resident and the outside world. The Balance of Payment indicates the extent to which a country saves enough money to cover its imports. It also reveals whether th 14 min read Important FormulasImportant Formulas in Macroeconomics | Class 12Chapter: Introduction1. Net InvestmentNet Investment = Gross Investment – Depreciation 2. Net Indirect TaxNet Indirect Tax = Indirect Taxes - Subsidies 3.  Market PriceMarket Price = Factor Cost + Net Indirect Taxes OR = Factor Cost + (Indirect Taxes - Subsidies) 4. Net factor Income from Abroad (NF 7 min read CBSE Previous Year Papers (2020)CBSE Class 12 Economics Solved Question Paper 2020 - Set 1Economics (Code No. 58/1/1) Time allowed : 3 hoursMaximum Marks: 80 General Instructions: Read the following instructions very carefully and strictly follow them : (i) This question paper comprises two sections - A and B. All questions are compulsory. (ii) Question numbers 1 – 10 and 18 – 27 are 15+ min read CBSE Class 12 Economics Solved Question Paper 2020 (Set 58/1/2)Economics (Code No. 58/1/2) Time allowed : 3 hoursMaximum Marks: 80General Instructions: Read the following instructions very carefully and strictly follow them : (i) This question paper comprises two sections - A and B. All questions are compulsory. (ii) Question numbers 1 – 10 and 18 – 27 are v 15+ min read Class 12 Economics Solved Question Paper 2020 (Set 58/1/3)Economics (Code No. 58/1/3) Time allowed : 3 hoursMaximum Marks: 80 General Instructions: Read the following instructions very carefully and strictly follow them : (i) This question paper comprises two sections - A and B. All questions are compulsory. (ii) Question numbers 1 – 10 and 18 – 27 are 15+ min read CBSE Class 12 Economics Solved Question Paper 2020 - Set 2Economics (Code No. 58/2/1) Time allowed : 3 hoursMaximum Marks: 80 General Instructions: Read the following instructions very carefully and strictly follow them : (i) This question paper comprises two sections - A and B. All questions are compulsory. (ii) Question numbers 1 – 10 and 18 – 27 are 15+ min read CBSE Class 12 Economics Solved Question Paper 2020 - Set 2 (58/2/2)Economics (Code No. 58/2/2) Time allowed : 3 hoursMaximum Marks: 80 General Instructions: Read the following instructions very carefully and strictly follow them : (i) This question paper comprises two sections - A and B. All questions are compulsory. (ii) Question numbers 1 – 10 and 18 – 27 are 15+ min read CBSE Class 12 Economics Solved Question Paper 2020 - Set 2 (58/2/3)Economics (Code No. 58/2/3) Time allowed : 3 hoursMaximum Marks: 80 General Instructions: Read the following instructions very carefully and strictly follow them : (i) This question paper comprises two sections - A and B. All questions are compulsory. (ii) Question numbers 1 – 10 and 18 – 27 are 15+ min read CBSE Class 12 Economics Solved Question Paper 2020 - Set 3Economics (Code No. 58/3/1) Time allowed : 3 hoursMaximum Marks: 80 General Instructions: Read the following instructions very carefully and strictly follow them : (i) This question paper comprises two sections - A and B. All questions are compulsory. (ii) Question numbers 1 – 10 and 18 – 27 are 15+ min read CBSE Class 12 Economics Solved Question Paper 2020 - Set 3 (58/3/2)Economics (Code No. 58/3/2) Time allowed : 3 hoursMaximum Marks: 80 General Instructions: Read the following instructions very carefully and strictly follow them : (i) This question paper comprises two sections - A and B. All questions are compulsory. (ii) Question numbers 1 – 10 and 18 – 27 are 15+ min read CBSE Class 12 Economics Solved Question Paper 2020 - Set 3 (58/3/3)Economics (Code No. 58/3/3) Time allowed : 3 hoursMaximum Marks: 80 General Instructions: Read the following instructions very carefully and strictly follow them : (i) This question paper comprises two sections - A and B. All questions are compulsory. (ii) Question numbers 1 – 10 and 18 – 27 are 15+ min read CBSE Class 12 Economics Solved Question Paper 2020 - Set 4 (Code No. 58/4/1)Economics (Code No. 58/4/1) Time allowed : 3 hoursMaximum Marks: 80 General Instructions: Read the following instructions very carefully and strictly follow them : (i) This question paper comprises two sections - A and B. All questions are compulsory. (ii) Question numbers 1 – 10 and 18 – 27 are 15+ min read CBSE Class 12 Economics Solved Question Paper 2020 - Set 4 (58/4/2)Economics (Code No. 58/4/2) Time allowed : 3 hoursMaximum Marks: 80 General Instructions: Read the following instructions very carefully and strictly follow them : (i) This question paper comprises two sections - A and B. All questions are compulsory. (ii) Question numbers 1 – 10 and 18 – 27 are 15+ min read CBSE Class 12 Economics Solved Question Paper 2020 - Set 4 (58/4/3)Economics (Code No. 58/4/3) Time allowed : 3 hoursMaximum Marks: 80 General Instructions: Read the following instructions very carefully and strictly follow them : (i) This question paper comprises two sections - A and B. All questions are compulsory. (ii) Question numbers 1 – 10 and 18 – 27 are 15+ min read CBSE Class 12 Economics Solved Question Paper 2020 - Set 5 (58/5/1)Economics (Code No. 58/5/1) Time allowed : 3 hoursMaximum Marks: 80 General Instructions: Read the following instructions very carefully and strictly follow them : (i) This question paper comprises two sections - A and B. All questions are compulsory. (ii) Question numbers 1 – 10 and 18 – 27 are 15+ min read CBSE Class 12 Economics Solved Question Paper 2020 - Set 5 (58/5/2)Economics (Code No. 58/5/2) Time allowed : 3 hoursMaximum Marks: 80 General Instructions: Read the following instructions very carefully and strictly follow them : (i) This question paper comprises two sections - A and B. All questions are compulsory. (ii) Question numbers 1 – 10 and 18 – 27 are 15+ min read CBSE Class 12 Economics Solved Question Paper 2020 - Set 5 (58/5/3)Economics (Code No. 58/5/3) Time allowed : 3 hoursMaximum Marks: 80 General Instructions: Read the following instructions very carefully and strictly follow them : (i) This question paper comprises two sections - A and B. All questions are compulsory. (ii) Question numbers 1 – 10 and 18 – 27 are 15+ min read Like