Principle of Effective Demand: Aggregate Demand and Aggregate Supply

Introduction

            The logical starting point of Keynes’s theory of employment is the principle of effective demand. In a entrepreneurial economy, the level of employment is based on effective demand. Thus employment results from a deficiency of effective demand and the level of employment can be raised by increasing the level of effective demand.

Aggregate Demand

       “The aggregate demand price for the output of any given amount of employment is the total sum of money or proceeds which is expected from the sale of the output produced when that amount of labour is employed.” Thus the aggregate demand price is the amount of money which the entrepreneurs expect to get by selling the output produced by the number of men employed. In other words it refers to the expected revenue from the sale of output produced at a particular level of employment. Different aggregate demand prices relate to different levels of employment in the economy.

According to Keynes the aggregate demand function is an increasing function of the level of employment and is expressed as D = F (N), where D is the proceeds which entrepreneurs expect from the employment of N men.

Level of Employment In 100 thousands	Aggregate Demand Price (D) In Million $
4	460
5	480
6	500
7	520
8	540
9	560
10	580

       The aggregate demand curve can be drawn on the basis of the above schedule. It inclines upward from the left to right for the reason that the level of employment increases aggregate demand price also rises, shown as AD curve in the upcoming diagram 1.

                                    

Aggregate Supply Price

            When an entrepreneur gives employment to a definite amount of labour, it requires certain quantities of co-operant factors like land, capital, raw materials etc. which will be paid remuneration along with labour. Thus each level of employment involves certain money costs of production including normal profits which the entrepreneur must cover. “At any given level of employment of labour aggregate supply price is the total amount of money which all the entrepreneurs in the economy, taken together must expect to receive from the sale of the output produced by that given number of men, if it is to be just worth employing them.

The below tablet reveals the aggregate supply schedule,

Level of Employment (N) in 100 Thousands	Aggregate Supply Prize (Z) In Million $
4	430
5	460
6	490
7	520
8	550
9	580
10	610

            The above table reveals that the aggregate supply prices rise with the hike in the level of employment.