impact of excess demand on economy in the aspect of

production

employment

income

nature of supply inputs

Excess demand refers to a situation where the actual aggregate demand for output is above the full employment level of output.

Impact of excess demand on production: Since, the economy is already operating at the full employment level of output and employment so; the level of production cannot be further increased beyond the full employment level. Hence, the level of production remains constant.

Impact of excess demand on employment: As the economy is operating at the full employment level, so the factors of production in the economy are fully employed. The level of employment cannot be increased beyond the full employment level. That is, due to excess demand there is no change in the level of employment in the economy.

Impact of excess demand on income: Since the level of employment and production cannot be increased so, the (real) income also remains the same. It should be noted that while the nominal income rises in the form of rise in wages, this rise in the nominal income is offset by the rise in prices so, real income remains unchanged. 

Impact of excess demand on nature of supply of inputs:Excess demand exerts inflationary pressures on the economy. In response to the rise in the general price level, the labour and the trade unions bargain to raise their wages and as a result, the prices of the factors (or input prices) rise. However, in exchange of the increased wages, the supply of the labour and other factor inputs remains the same as the economy is already at the full employment level. Thus, due to the excess demand the supply of factor inputs remains inelastic (or cannot be increased further).