Principle of Effective Demand

Principle of Effective Demand is the starring point of Keynesian theory of employment. According to him, the level of employment depends on effective demand.

Effective Demand

Demand becomes effective demand when income is spent in buying consumption goods and investment goods. So, Effective demand is the total demand for goods and services at various levels of employment. The level at which aggregate demand is equal to aggregate supply is the point of effective demand.

Aggregate Demand Function

Aggregate demand price is the total sum of money or proceeds, which is expected from the sale of the output produced when that amount of labour is employed.

In other words, it is the expected revenue from the sale of output produced at a particular level of employment.

Level of Employment	Aggregate Demand Price
20	230
25	240
30	250
35	260
40	270
45	280
50	290

Aggregate Supply Function

It is the cost of production and it shows the minimum expected receipts so as to cover the cost of production.

Level of Employment	Aggregate Supply Price
20	215
25	230
30	245
35	260
40	275
40	290
40	305

Determination of Effective Demand

Level of Employment	Aggregate Supply Price	Aggregate Demand Price
20	215	230
25	230	240
30	245	250
35	260	260
40	275	270
40	290	280
40	305	290