Determinants Of Effective Demand

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Determinants of Effective Demand

Effective demand depends two factors:
1.    Aggregate demand function, and
2.    Aggregate supply function.
Now, we shall discuss in detail the two important determinants of effective demand

Aggregate Demand Function

Aggregate demand refers to the total expenditure of an economy on the goods and services at a given level of income and employment. Goods and services demand for two purposes, viz. (1) consumption, and (2) investment.

The households demand consumption goods like wheat, bread, etc. and services like transport and entertainment, etc. The demand for consumption goods originating from the private households is known as private consumption. Similarly, the government may also demand consumption goods. This type of demand is known as public consumption. Private consumption and public consumption added together constitute the total consumption demand for goods and services.

The second important constituent of the total consumption demand for goods and services is the demand for investment, i.e., the demand for capital goods. Again the investment. Similarly, the demand for capital goods by the government is know as public investment. Private investment and public investment taken together constrictive the total investment demand by the community.

The aggregate of consumption demand and the investment demand constitute the aggregate demand. In short.

Aggregate Demand = Consumption Demand + Investment Demand

Aggregate demand as a sum total of expenditure in the economy. Whenever the households, firms and the government demand any goods and services they incur expenditure on the same. We can, therefore, also look upon aggregate demand of the community as the aggregate expenditure by the community incurred on the purchase of goods and services. A part of the expenditure will assume the form of consumption expenditure (corresponding to private consumption plus public consumption) and the other part will consist investment expenditure. Thus, we can also say that

Aggregate     =     Aggregate     Consumption        Investment
Demand               Expenditure   Expenditure          Expenditure

It implies that an increase in either aggregate consumption or aggregate investment or bo the can push the aggregate demand upwards.

Relation between Aggregate Expenditure and the level of Employment. The aggregate expenditure (i.e., the aggregate demand) depends upon the level fo employment in the economy. There will, more generally, be a direct positive relationship between the level f employment and the level expenditure in the economy. As the level of employment raises in the economy, the aggregate expenditure will also rise, and vice-versa.

Diagrammatic Representation of Aggregate Demand. Suppose, we take different levels of employment and prepare a schedule of sale proceeds at each level of employment, we will get the aggregate demand schedule or the aggregate demand function. It is illustrated.

In the horizontal axis represents the volume of employment and the vertical axis represents the aggregate income or sale process from the output. As the level of employment increases from ON to ON( ) to ON( ), the volume of total sale proceeds (or expected expenditure of the community) increases from OR to OR( ). This functional relationship can be symbolically expressed as

AD = f(N)

Where AD represents sale proceeds expected by entrepreneurs (or expected expenditure of the community) and N indicates the number of workers employed.

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