Following are two alternative conditions of national income equilibrium :
1. Aggregate demand = Aggregate supply
2. Planned investment = Planned supply
If economy is not in the equilibrium, there may be either of the following situations in the economy :
1. Excess demand or inflationary gap.
2. Deficient demand or deflationary gap.
(1) Excess demand – Excess demand is an excess of anticipated expenditure over available output at constant prices. In other words, when aggregate demand exceeds aggregate supply at full employment, the demand is said to be an excess demand. Thus,
Excess Demand = Aggregate Demand – Aggregate Supply
Following diagram shows the concept of excess demand :
(2) Deficient demand – Deficient demand means that aggregate demand is not sufficient to ensure equilibrium with aggregate supply at the full employment. Deficient demand may be defined as an excess of aggregate supply over aggregate demand at the full employment level. Thus,
Deficient demand = Equilibrium level of expenditure – Planned aggregate expenditure = Aggregate supply – Aggregate demand
Following is the diagram showing deficient demand
