Determinants of Effective Demand > Aggregate Demand Function

Effective demand is determined by two main forces: the Aggregate Demand (AD) Function and the Aggregate Supply (AF) Function. Aggregate demand represents the total sale proceeds that entrepreneurs expect to receive from selling the output produced by a specific number of workers.

• "The aggregate demand price for the output of any given amount of employment is that total sum of money or proceeds which is expected from the sale of the output produced when that amount of labour is employed." — Dudley Dillard
• "The aggregate demand price at any level of employment is the amount of money which all the entrepreneurs in an economy taken together really do expect that they will receive if they sell the output produced by this given number of men." — Stonier and Hague
• "Aggregate Demand Function is a schedule of the various amounts of money which the entrepreneurs in the economy expect from the sale of their output of various levels of employment." — Peterson

• Symbolic Function: D = f(N) (where D is demand/receipts and N is employment).
• Components of AD: AD = C + I + G + (X - M).
  C: Household Consumption.
  I: Private Investment.
  G: Government Demand.
  (X - M): Net Exports (Exports minus Imports).

To understand the AD curve, we look at the Aggregate Demand Schedule, which lists expected proceeds at varying employment levels:

1. Zero Level: AD is positive due to Autonomous Consumption.
2. Increasing Employment: As more men are employed (from 1 to 5 million), expected receipts rise (from ₹17 to ₹52 million).
3. Diminishing Rate: While receipts rise as employment grows, the rate of increase eventually slows down.

• X-Axis: Represents the Level of Employment.
• Y-Axis: Represents Expected Receipts.
• Curve Shape: The AD curve starts above the origin (at point P) and slopes upward. It is steep at first but becomes flatter at higher levels of employment.

• Autonomous Consumption: A person using their savings to buy bread while unemployed. This is why the AD curve starts at point P, above zero.
• The Consumption Function: A worker gets a ₹5,000 bonus but only spends ₹3,500 of it, saving the rest. Consumption rises with income, but not by the full amount.
• Expected Receipts: A shop owner hires two extra clerks for a festival because they expect the increased sales (receipts) will more than cover the cost of hiring them.
• Net Exports (X-M): An economy selling more cars abroad (Exports) than it buys from other countries (Imports), which adds to the total Aggregate Demand.

• Effective Demand: Determined by two functions: Aggregate Demand (AD) and Aggregate Supply (AS).
• AD Definition: The total sale proceeds entrepreneurs expect to receive from selling output produced at a specific employment level.
• The AD Curve: It starts above the origin (Point P) because Autonomous Consumption is always positive, even if income is zero.
• Employment Link: Higher employment leads to more output and higher expected receipts, but the rate of increase eventually slows down.
• Keynes' Consumption Rule: As income rises, consumption also rises, but not by the same amount as the income increase.