Q.What is meant by "effective demand" in Keynesian theory?

Effective demand is the level of aggregate demand that equals aggregate supply — the point where the Aggregate Demand Price and Aggregate Supply Price are equal. At this point the equilibrium level of employment and national output is determined in the Keynesian theory.

Meaning

In the Keynesian theory of employment, the level of employment depends on aggregate demand. As the level of employment increases, both the Aggregate Supply Price (the amount producers must receive to offer that employment) and the Aggregate Demand Price (the amount they actually expect to receive from sales) change. The particular level at which the Aggregate Demand Price becomes exactly equal to the Aggregate Supply Price is called effective demand.

Explanation

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Effective demand is the level of aggregate demand at which aggregate demand price equals aggregate supply price. At this point entrepreneurs have no incentive to change the level of employment, so effective demand determines the equilibrium level of income and employment.

Meaning

In Keynes's theory, the level of employment depends on effective demand, which is settled by the interaction of aggregate demand and aggregate supply.

• Aggregate demand price is the total receipts entrepreneurs expect from selling the output of a given number of workers.
• Aggregate supply price is the total receipts entrepreneurs must get to just cover the cost of employing that number of workers. …

Effective demand is the level of aggregate demand that equals aggregate supply; at this equilibrium point the entrepreneurs' expected sale proceeds are just realised. In Keynes's theory it determines the level of output and employment in the economy.

Meaning

In Keynes's theory of employment, effective demand is the point at which aggregate demand equals aggregate supply.

• Aggregate demand is the total amount that all buyers in the economy are expected to spend.
• Aggregate supply is the total value of output that producers are willing to supply at various levels of employment.

Entrepreneurs go on employing workers and producing output up to the point where their expected sale proceeds (aggregate demand) just equal the cost of producing that output (aggregate supply). This point of equality is called effective demand.

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