What is effective demand?

In an economic study, the total demand is the total value of the goods and services that consumers must buy in order to keep the market in balance. In balance, the supply of goods is exactly equal to demand, so there is no lack or excess. This equilibrium demand is also referred to as notation demand and represents mainly theoretical value. For a more accessible approach, economists rely on effective demand. Effective demand captures the overall value of products that consumers actually buy at a given price rather than the value of the products needed to achieve balance.

At the beginning of the 19th century, the economic study dominated the idea that the supply dictated demand. According to the widely held economic theory from this period known as Say's law, the level of aggregated demand will be exactly the same as the amount of product that manufacturers decide to produce. One of the critics of this theory was Thomas Robert Malthus, an economist who claimed that he said it to the economic recessionm. When consumers could not buy these products, the economy would reduce, resulting in a recession.

Malthus' theory was largely ignored for the next century and Say's law remained a dominant theory. It was not until the 1930s that John Maynard Keynes published a new work in economics that rejected Say's law and adopted the concept of effective demand. According to Keynes, demand creates supply rather than vice versa. Theoretically, there is a balance when the aggregated supply and aggregated demand are the same. After published the main works of Keynes, economists began to understand that in the real world it was set up on consumers to set a summary demand, so the suppliers let the appropriation responding by setting up the level levelAggregated offers on the basis of this demand.

The concept of effective demand can be graphically illustrated using the function of aggregated expenditure, which shows the relationship between the rate of production and expenditure. If the Say law were true, the expenses would increase by one unit for each unit of production. Instead, the function of aggregated expenditure shows that expenditure increases for each unit of production by less than one full unit. This helps to illustrate the concept of effective demand and refutes the idea of ​​Say's law. Instead of simply buying what suppliers produce, consumers choose how to spend their money, and they may decide to be neutral at all if the supply does not correspond to the demand.