Define or Explain the following concept:
4) Effective Demand
Answer: Effective demand: Effective demand is defined as the total expenditure incurred by all people in an economy on the various goods and services produced in the economy over a given period of time. Effective demand is determined by the intersection of aggregate demand and aggregate supply. The concept of effective demand can be explained with the help of the given diagram.
The x-axis represents the income/output level and the y-axis represents the level of aggregate demand. E is the equilibrium point where the two curves (AS and AD) meet. EQis the effective demand and the output level as determined by AD (assuming the elasticity of supply to be perfectly elastic).
