Effective Demand

Effective Demand - they expect But in reality what falls in...

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Effective Demand: The prospects of high levels of output and employment depend upon size of the effective demand and not the rate of wages. Effective demand is the total monetary expenditure of the community and is therefore a price . It depends upon two other variables, namely, aggregate demand (ADP) and aggregate supply price (ASP). Effective demand (ED) is then an equilibrium value determined at the point of intersection of the ADP and ASP schedules. These have been defined by Keynes as follows: 'ADP is that money value of all goods and services which producers actually receive .' ASP is that money value of all goods and services which producers expect to realize in the market .’ Thus producers plan their output and employment decisions on the basis of value of the ASP that
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Unformatted text preview: they expect. But in reality what falls in their hand is the total expenditure or ADP that consumers are prepared to undertake. If ADP value satisfies ASP value then the producers continue to produce as before and employ as many workers as before. But if ADP falls short of the ASP then producers’ expectations are not fully satisfied and they are induced to reduce output and demand for labor. This causes unemployment. Therefore the cause of unemployment has been detected. It is then deficiency in the effective demand that is the culprit which results in unemployment. Let’s illustrate this with the help of a figure. It will also help to draw a distinction between classical partial equilibrium and Keynes’ general equilibrium analysis ....
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This note was uploaded on 11/17/2011 for the course EC ec 201 taught by Professor - during the Fall '10 term at Montgomery.

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Effective Demand - they expect But in reality what falls in...

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