what is the difference between deflationary gap and deficient demand

Dear Student,

 

Deficient demand is very different from deflationary gap. In fact, it is the deficient demand that leads to deflationary gap. To be specific, deficient demand is the cause and deflationary gap is the effect.

 

Deficient demand implies a situation where the equilibrium aggregate demand for output (AD_E) is below the full employment level of output (AD_F). In simple words, it can be described as a situation, where economy is demanding lesser units of output than what can be produced by fully employing all the available resources. Symbolically, deficient demand can be described by the following inequality:

AD_E  ​< AD_F   ⇒ Situation of Deficient Demand

In a situation of deficient demand, the production can be increased beyond the full employment level of output (where all the resources are fully utilised) but because of deficient demand prices tend to fall (due to excess supply). As a result, deflationary gap emerges. This gap is the difference between aggregate demand at the full employment level and at equilibrium. Algebraically, deflationary gap is expressed as:

AD_​F  –  AD_​E   ⇒ Deflationary Gap