English
CISCEISC (Commerce) Class 12
Question Papers354
Textbook Solutions18218
Important Solutions5670
Concept Notes & Videos605
Time Tables15
Syllabus

Critical Evaluation of Effective Demand

Advertisements

Topics

Estimated time: 9 minutes
  • Superfluous use of the word “effective”
  • Partial treatment of unemployment
  • Limited applicability to underdeveloped countries
  • Cause and effect relationship reversed
  • Problem with expectations in effective demand
  • Doubtful direct relation between income, demand and employment
  • Key Points: Critical Evaluation of Effective Demand
CISCE: Class 12

Superfluous use of the word “effective”

  • Economists like Hazlitt and Hutt argue that the word effective in effective demand is unnecessary.
  • In economics, demand itself means desire backed by ability and willingness to pay, so adding “effective” may confuse students and readers.
CISCE: Class 12

Partial treatment of unemployment

  • Keynesian effective demand mainly explains involuntary unemployment.
  • Critics point out that other types of unemployment, such as frictional, seasonal, disguised and voluntary unemployment, are not clearly explained by this theory, so the explanation of unemployment remains incomplete.
CISCE: Class 12

Limited applicability to underdeveloped countries

  • In underdeveloped or developing economies, the main problem is often inelastic supply (shortage of capital, poor technology, lack of infrastructure).
  • Critics say that the Keynesian focus on demand deficiency does not fit these economies well because even if demand increases, output cannot rise easily due to supply constraints.
CISCE: Class 12

Cause and effect relationship reversed

  • Hutt criticises the very idea of aggregate effective demand, arguing that Keynes has reversed cause and effect.
  • According to this view, in some economies employment may not be determined by demand; instead, as employment and production increase, people get more income and then increase their demand (employment affects demand, not the other way round).
CISCE: Class 12

Problem with expectations in effective demand

  • Effective demand is a dynamic concept because it includes expectations about future receipts or sales.
  • Critics say that if a part of aggregate demand is only expected and not yet realised, then it cannot be fully “effective” for the economy as a whole, since actual spending may differ from expected spending.​
CISCE: Class 12

Doubtful direct relation between income, demand and employment

  • Keynes shows a direct relationship: higher effective demand → higher income → higher employment.
  • Critics point out that employment also depends on skills, technology, inventions and methods of production, so we cannot always establish a simple, direct relationship between income, demand and employment.
CISCE: Class 12

Key Points: Critical Evaluation of Effective Demand

  • The term “effective” demand is considered unnecessary and misleading by some economists.
  • The theory explains only involuntary unemployment, ignoring other types of unemployment.
  • It is less applicable to underdeveloped countries, where the problem is supply-side, not demand.
  • Critics argue Keynes reversed cause and effect between demand and employment.
  • Overemphasis on expected demand and a direct link between demand and employment is questioned.

Test Yourself

Advertisements
Share
Notifications

Englishहिंदीमराठी
Login
Create free account


      Forgot password?
Course
Use app×