Principle of Effective Demand is the pillar of Keynesian Theory of Employment Dillard considers the principle of effective demand to be the logical starting point of Keynesian Theory of Employment ID: 1027268
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1. Principle of Effective DemandPrinciple of Effective Demand is the pillar of Keynesian Theory of EmploymentDillard considers the principle of effective demand to be the logical starting point of Keynesian Theory of Employment.Keynes has used the term Effective Demand in the third chapter of his book General Theory.Effective demand is that level of aggregate demand at which it is equal to aggregate supply.Effective demand is expressed by aggregate expenditure of an economy.
2. In words of Keynes, “ The value of aggregate demand at the point of demand function where it is interesected by aggregate supply function will be called effective demand.”Prior to Keynes, Malthus and Wicksell also propounded the Theory of Effective demand. However credit for logical analysis of effective demand goes to Keynes.
3. Determinants of Effective Demand Effective DemandAggregate DemandAggregate SupplyADPADF /ADSADCASPASF/ASSASC
4. Aggregate DemandAD refers to aggregate demand expenditure in an economy.It refers to the amount that all the people of an economy may spend on buying goods produced at a given level of employment.There are three related concepts: ADP, ADF, ADCAggregate Demand Price (ADP):ADP is producer’s maximum expected receipts from the sale of their output at a particular level of employment.
5. ADFAggregate Demand Schedule or Aggregate Demand Function: It refers to the entire table showing producer’s maximum expected receipts from the sale of their output corresponding to various levels of employment.AD=f(N)Level of Employment (in Lakh)Aggregate demand price (ADP) in crore rs.0102030405060100360420480540600660
6. ADCAggregate Demand Curve (ADC):It is a curve which expresses relationship between aggregate demand price and employment.ADExpected ReceiptsEmploymentOXY
7. Aggregate SupplyIt refers to that amount of money which all the producers in the economy will spend on producing goods at a given level of employment.There are three related concepts- ASP, ASF, ASCAggregate Supply Price (ASP)It is the cost of production. It is the minimum amount of money which all producers have to spend to produce output at a given level of employment. So it is the minimum sale proceeds which all the producers must get by selling output produced by given level of employed persons.
8. Aggregate Supply Schedule /Aggregate Supply Function (ADF):It is a schedule/Table which shows various amount of money which all the producers must receive from the sale of output at varying levels of employment.Level of EmploymentAggregate Supply Price (crore rs)01020304050600120240360480600720
9. Y Aggregate Supply CurveAS=f(N)Minimum Expected ProceedsEmploymentASCXY
10. Determination of Effective DemandEmploymentAD(crore rs)AS (crore rs)Equilibrium01020304050601003604204805406006600120240360480600720DisequiAD>ASAD>ASAD>ASAD>ASEDAD<ASExpected ReceiptsEmploymentXYEEffective DemandADASO
11. Equilibrium not necessarily at full employmentE Underemployment E1 Full Employment E2 Over Full EmploymentADAD1AD2Expected ReceiptsEmploymentXYOAS
12. Importance of Effective DemandDr. Klein says, “ Keynesian revolution is indeed implicit in his theory of effective demand.”Discards Say’s LawRefutes Pigou’s Theory of wagesImportance of InvestmentParadox of povertyLevel of EmploymentUnder employment equilibriumMore importance to demand