Effective demand is defined as the level of aggregate demand that is equal to aggregate supply. Aggregate demand represents how much money entrepreneurs expect to receive from sales, while aggregate supply represents how much money entrepreneurs must receive from sales. The level of employment is determined by the equilibrium between aggregate demand and aggregate supply, which is known as effective demand. Effective demand shows that other factors like the level of employment are also determined by the interaction of demand and supply in the economy.

1. EFFECTIVE DEMANDEFFECTIVE DEMAND
““THAT LEVEL OF AGGREGATE DEMANDTHAT LEVEL OF AGGREGATE DEMAND
WHICH IS EQUAL TO AGGREGATE SUPPLYWHICH IS EQUAL TO AGGREGATE SUPPLY
IS KNOWN ASIS KNOWN AS ED.”ED.”

2. EXPLANATION:-EXPLANATION:-
•Effective demand tells that other factors likeEffective demand tells that other factors like level oflevel of
employmentemployment is also determined by DEMAND andis also determined by DEMAND and
SUPPLY.SUPPLY.
•AD:- How much money is expected to receive by theAD:- How much money is expected to receive by the
enterprenure by selling his products. or { aggregateenterprenure by selling his products. or { aggregate
expenditure }expenditure }
• AS:- How much money he must receive by selling hisAS:- How much money he must receive by selling his
product.product.

3. ED V/S EMPLOYMENTED V/S EMPLOYMENT
• When entrepreneurWhen entrepreneur
makes more investmentmakes more investment
there is a change inthere is a change in
agg.supply.agg.supply.
• Which leads to increaseWhich leads to increase
in level of employment.in level of employment.
• With this effect there is aWith this effect there is a
change in AD.change in AD.
• Position of equilibriumPosition of equilibrium
b/w AD and AS is knownb/w AD and AS is known
asas EFFECTIVEEFFECTIVE
DEMANDDEMAND

4. EFFECTIVE DEMAND
AD
SCHEDULE
AD
PRICE
AS
SCHEDULE
AS
PRICE

5. CONTENTS OF Agg.demandCONTENTS OF Agg.demand
• AD.PRICE TOTAL SALEAD.PRICE TOTAL SALE
PROCEEDS THAT ALLPROCEEDS THAT ALL
ENTREP.EXEPECTENTREP.EXEPECT
FROM SALE OFFROM SALE OF
OUTPUTOUTPUT
• AGG.DEMANDAGG.DEMAND
SCHEDULESCHEDULE DEPICTS ALLDEPICTS ALL
THE RECEIPTS WHICH ANTHE RECEIPTS WHICH AN
ENTREP.EXPECTED TOENTREP.EXPECTED TO
RECEIVE AT DIFF.LEVEL OFRECEIVE AT DIFF.LEVEL OF
EMPLOYMENTEMPLOYMENT
LEVEL OFLEVEL OF
EMPLOYMENTEMPLOYMENT
AD. PRICEAD. PRICE
00
1010
2020
3030

6. CONTENTS OF Aggr.supplyCONTENTS OF Aggr.supply
• AGG.SUPPLYAGG.SUPPLY PRICEPRICE
DEPICTS THE AMTDEPICTS THE AMT
WHICH AN ENTP.WHICH AN ENTP.MUSTMUST
SPENT TO PRODUCESPENT TO PRODUCE
OUTPUTOUTPUT
COST OFCOST OF
PRODUCTIONPRODUCTION
EmpEmp.. AGG.SUPPLYAGG.SUPPLY
PRICE{CRORES}PRICE{CRORES}
00 00
1010 120120
2020 240240
4040 360360
DEPICTS ALL THE AMTS.WHICHDEPICTS ALL THE AMTS.WHICH
AN ENTRP.AN ENTRP. MUSTMUST RECEIVE ATRECEIVE AT
DIFF .LEVELS OF EMPLOYMENTDIFF .LEVELS OF EMPLOYMENT
• AGG.SUPPLYAGG.SUPPLY
SCHEDULESCHEDULE

7. ED=AD+ASED=AD+AS

8. DETERMINATION OF EDDETERMINATION OF ED
EMPLOEMPLO
YMENTYMENT ADAD ASAS EQUILIBEQUILIB
RIUMRIUM
00 100100 00 ----------
1010 320320 200200 AD>AAD>A
SS
2020 450450 360360 AD>AAD>A
SS
3030 540540 480480 AD>AAD>A
SS
4040 600600 600600 EDED
5050 640640 720720 AD<AAD<A
SS

9. SO STUDY OF THE SCHEDULE SHOWS THATSO STUDY OF THE SCHEDULE SHOWS THAT
EQILIBRIUM IS NOT NECESSARY AT FULLEQILIBRIUM IS NOT NECESSARY AT FULL
EMPLOYMENT.EMPLOYMENT.

10. CRITICISMCRITICISM
• USE OF THE TERMUSE OF THE TERM “EFFECTIVE”“EFFECTIVE” ISIS
MEANINGLESS.MEANINGLESS.
• IT SAYS THAT EFFECTIVE DEMAND IS ALSO AN EXPECTEDIT SAYS THAT EFFECTIVE DEMAND IS ALSO AN EXPECTED
DEMAND.IF IT IS EXPECTED THEN IT CAN HARDLY BEDEMAND.IF IT IS EXPECTED THEN IT CAN HARDLY BE
CALLEDCALLED “EFFECTIVE”.“EFFECTIVE”.
• THERE IS NO COMPLETE RELATION B/W EMPLOYMENT ANDTHERE IS NO COMPLETE RELATION B/W EMPLOYMENT AND
INCOME.INCOME.
• THIS THERY DOESN’T APPLY TO UNDER DEVELOPEDTHIS THERY DOESN’T APPLY TO UNDER DEVELOPED
ECONOMIES.ECONOMIES.
• IT IGNORES THE GOVT.EXPENDITUREAND NET EXPORTS.IT IGNORES THE GOVT.EXPENDITUREAND NET EXPORTS.

11. Submitted to:-Submitted to:-
Ms. KiranMs. Kiran
Submitted by:-Submitted by:-
Jaspreet kaur BhatiaJaspreet kaur Bhatia