Principle of Effective Demand

The principle presented in that chapter is that the aggregate demand function and the aggregate supply function intersect each other at the point of effective demand and that this point can be consistent with a state of under-employment and under-capacity utilization. In other words, employment cannot increase unless investment increases. This is the core of the principle of effective demand.

Aggregate Demand Price

Aggregate demand represents the total demand for goods and services at any given price level in a given period. Aggregate demand over the long-term equals gross domestic product (GDP) because the two metrics are calculated in the same way. The aggregate demand price at any level of employment is the amount of money that all the entrepreneurs in an economy taken together really do except that they will receive if they sell the output produced by this given amount of men. Aggregate demand is an economic measurement of the total amount of demand for all finished goods and services produced in an economy. Aggregate demand is expressed as the total amount of money exchanged for those goods and services at a specific price level and point in time.

Aggregate Supply Price

Aggregate supply price also increases and vice versa, For the sake of simplicity, let us assume that the aggregate supply price represents a proportional relationship and it may be represented in a straight line starting from the origin with 450 to the X-axis. At any given level of employment of labor, the aggregate supply price is the total amount of money which all the entrepreneurs in the economy, taken together, most receive from the sale of the output produced by that given number of men if it is worthwhile employing them. Keynes’s aggregate supply price function is derived from ordinary Marshallian microeconomic supply price functions. It relates the aggregate number of workers that profit-maximizing entrepreneurs would want to hire for all possible alternative levels of expected aggregate sales proceeds.