WHAT IS AN EFFECTIVE DEMAND? 

Effective demand is an equilibrium point where aggregate demand is equal to aggregate supply.

 In simple words, Effective demand is total spending by the community or citizens of a country on goods and services.

Effective demand was given by JM Keynes in his book “Theory of employment, interest and money”

According to Keynes effective demand determines the level of employment. Total employment depends upon effective demand. More the effective demand higher will be employment level. Unemployment is due to a lack of effective demand in a country. 

DIAGRAM:

 

EXPLANATION:

1) AD is aggregate demand curve and AS is aggregate supply curve.

2) The aggregate demand curve slopes upward from left to right at a diminishing rate.

3) Aggregate supply curves slope upward from left to right at an increasing rate.

4) At point NF there is full employment.

5) But at point E aggregate supply is equal to aggregate demand which determines effective demand.

6) Effective demand is before full employment level due to the inefficiency of aggregate demand and aggregate supply.