Principle of effective demand

In Keynesian Economics, the principle of effective demand is the principle that the aggregate demand function and the aggregate supply function intersect each other at the point of effective demand generally entailing under-employment and under-capacity utilization.[1] That is to say, "demand creates its own supply" in contrast to the Say's law which insists "supply creates its own demand". According to the principle of effective demand, the aggregate demand determines the level of output and employment in a country. "Principle of effective demand" is the title of chapter 3 of Keynes's General theory.[2]

Strangely enough, although the title of the chapter of General theory is "Principle of effective demand", the "principle" of effective demand is not stated in detail in the chapter.[3] After the term is mentioned on page 31, it is not mentioned again in the whole book.[3] In his General theory, Keynes defines the concept of an aggregate demand and an aggregate supply, then he defines the concept of effective demand as the point of intersection of the two aggregate functions. At this point of intersection, the aggregate demand becomes "effective".[3]

See also

References

  1. ↑ Geoffrey Harcourt and Peter Riach (2006). The General Theory. 1. Routledge. p. 95.
  2. ↑ Keynes, J. M. (1936). The General Theory (rendered into HTML by Steve Thomas in 2003) (PDF). University of Missouri-Kansas city.
  3. 1 2 3 Geoffrey Harcourt, Peter Riach (2006). The General Theory. 1. Routledge. p. 93.

External links

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