Page 63 - DECO402_Macro Economics

Macroeconomic Theory

Notes This perception of effective demand brought revolution in economic principle. The experience of this
principle is being proved. This principle describes that facts and cause, which describe the level of
employment and income.

Self Assessment

Fill in the blanks:
1. J. M. Keynes was the first economist; he gave an arranged principle of…………………….
2. Keynes gave a name of ……………………………..to prosperous principle.
3. …………………………..principle keeps the strategic importance in the employment principle
of Keynes.

6.2 Effective Demand
The principle of effective demand has a strategic importance with the employment principle of Keynes.
It is that point, where public demand curve and public supply curve intersect each other. In other
words, effective demand is that demand level in economy which is fully supported by related supply.
So entrepreneurs did not increase supply and decrease supply. Effective demand decides the level of
income and employment. The decrement in effective demand arise unemployment.
In effective demand two things are similar (i) demand of consumption things (ii) demand of capitalism
things and investment demand. If the increment of consumption demand is more than the increment
of total income, then it difference show the unemployment in economies. For increment in income
and employment the difference in income and consumption can remove by investment. So the level
of employment of is dependent on investment. So the effective demand is increase by investment for
increase the employment.
There are two important decider of effective demand:
1. Aggregate Demand, and
2. Aggregate Supply.

1. Aggregate Demand

The total addition of demand of things and services in economics calls aggregate demand. It is the
total of total consumption demand and total investment demand. The demand of consumption of
things and services are by self consumption and public consumption. And total addition of it calls
consumption demand. So the demand of investment is by entrepreneurship and government. Its
addition is called total investment demand.
When any person, firms and government demand the things and services, the expenditure of
consumption calls consumption expenditure. And the expenditure which is does on capitalism things,
calls investment. Briefly,
Aggregate Demand (Expenditure) = Consumption Demand + investment expenditure (investment
demand)
So Aggregate demand or expenditure is increase by the increment in investment expenditure or
consumption. And it directly contacted with employment level in country. In this figure 6.1. X-axis
show the volume of employment and Y-axis show the total expenditure. Aggregate expenditure can
understand the total finding of firms. Because all expenditures are belongs to firms, which supply
the things and services.

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