What is Effective Demand Class 12

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In this lecture, I will discuss about what is Effective Demand principle is in economics as per the syllabus of class 12 CBSE Board.

The topic of Effective Demand is concerned with the Determination of Income and Employment chapter (unit) of Macroeconomics class 12.

See, the term effective demand is used when we establish the equilibrium of National Income, output, and employment.

Let’s first discuss what is effective demand.

What do you mean by effective demand?

In short, In Keynes’s theory, effective demand is the point of equilibrium where aggregate demands equal aggregate supply.

Definition of Effective Demand

Effective Demand refers to that level of Aggregae Demand in short run which is satisfied with aggregate supply, where economy’s aggregate income and employment are determined.

What is effective demand principle explain with numerical example class 12

The effective demand may or may not be at the full employment level.

Effective demand is the demand, which decides the equilibrium level of income, employment, and output in an economy.

The producer has to adjust the supply as per the effective demand.

If the effective demand is less than the supply. The producer cut off the further production by firing the excess employees.

Thus the equilibrium of income would be at that point where all resources are not employed.

This is called the equilibrium of income at the underemployment level.

But When effective demand is enough to cover the whole supply. The equilibrium of income would be at the full employment level.

Q. 1. Define Effective Demand. Discuss how, effective demand can be restored, If ex-ante Aggregate Demnad (AD) is more than ex-ante Aggregate Supply (AS).

[O.D Set – I, II, 2020]

Answer:-

Definition of Effective Demand.

Effective Demand refers to that level of Aggregae Demand in short run which is satisfied with aggregate supply, where economy’s aggregate income and employment are determined.

When ex-ante AD > ex ante AS

If ex-ante Aggregate Demand (AD) is more than ex-ante Aggregate Supply (AS).

It means buyers are planning to buy more than what the producers are planning to produce.

Thus, the inventories in hand of producers may fall.

As a result, producers may plan to raise output by increasing employment.

This process will continue until AD and AS becomes equal.

Q. 2 Define effective demand. Discuss how effective demand can be restored if ex-ante saving is less than ex-ante investment.

[O.D. Set – III, 2021]

Answer:-

Definition of Effective Demand.

Effective Demand refers to that level of Aggregae Demand in short run which is satisfied with aggregate supply, where economy’s aggregate income and employment are determined.

When ex-ante AD < ex ante AS

If ex-ante Saving is less than ex-ante Investment, It means buyers are planning to buy more than what producers are planning to produce.

It will lead to shortage of inventories in the hands of producers.

To bring inventories at the desired level, producers expand production.

This process will continue untill Aggregate demand becomes equal to Aggregate supply.

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Anurag Pathak
Anurag Pathak

Anurag Pathak is an academic teacher. He has been teaching Accountancy and Economics for CBSE students for the last 18 years. In his guidance, thousands of students have secured good marks in their board exams and legacy is still going on. You can subscribe his youtube channel and can download the Android & ios app for free lectures.

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