Q.Explain the concept of effective demand with the help of a diagram.

Aggregate Supply is the total output (in value terms) firms are willing to produce at each level of employment; its curve rises and finally becomes vertical at full employment.

• Meaning: Aggregate Supply (AS) refers to the total value of goods and services that all firms in the economy plan to produce and supply during a period. The aggregate supply price is the minimum amount of sale proceeds that entrepreneurs must expect in order to employ a given number of workers.
• Relation to employment: as more workers are employed, more output is produced, so aggregate supply rises with the level of employment. …

Keynes's theory of employment holds that employment depends on effective demand (the point where aggregate demand equals aggregate supply); deficient demand causes involuntary unemployment, requiring government intervention.

In the Tamil Nadu HSC Class-12 Economics syllabus (Theories of Employment and Income), Keynes's theory can be explained in three points:

• Principle of effective demand: The level of employment depends on the level of effective demand, which is determined where the Aggregate Demand Function (ADF) equals the Aggregate Supply Function (ASF).
• Aggregate demand: Effective/aggregate demand is made up of consumption demand (C) and investment demand (I). When AD is high, output and employment rise; when AD is deficient, output and employment fall. …

Aggregate demand is the total planned expenditure on final goods and services in an economy; its four components are C, I, G and net exports (X − M).

Aggregate demand (AD) is the total effective demand for goods and services by all sectors of the economy at a given price level and income level in a period. It represents total planned spending.

Its components are:

1. Consumption expenditure (C): spending by households on goods and services — the largest component.
2. Investment expenditure (I): spending by firms on capital goods, machinery and inventories.
3. Government expenditure (G): government spending on goods and services.
4. Net exports (X − M): exports minus imports, the demand from the foreign sector.

Thus: AD = C + I + G + (X − M).

…