Effective demand is an ex-ante expenditure, i.e. willingness to make purchases by persons who have means of payment. It is necessary not to confuse effective demand with theoretical demand that would exist at a time when all markets were in a state of equilibrium. Thus, it excludes additional goods, which the unemployed would be able to enter if they took up a job or potential entrepreneurs, if they could obtain funds to open their own business.
Effective demand arises when the function of total supply and the function of total demand is equalized. The first dependency indicates the relationship between the number of employees and the aggregate price, which determines the expected value of revenues, which is able to provide the company with production costs and a normal profit. When prices maintain such a price level, then companies are able to start and maintain the right size of employment and production. The function of aggregate demand, on the other hand, speaks of the relationship between a given employment and the amount of income that will most probably be earned in a given employment. The size of employment, indicated by the point of intersection of both functions, is the most advantageous, since the predictable profit of enterprises will be the maximum. The size of effective demand will determine the amount of global employment.
A clear increase in aggregate effective demand is difficult to achieve, but if this is achieved, it can lead to rapid economic growth. To achieve this, it is necessary to use more wage-oriented measures, a reasonable redistribution of income and wealth, as well as working time, weakening the role of managers and owners, and activities that are able to some extent limit the possibilities of optimizing and tax avoidance by transnational corporations and people the rich. Such optimization is an element of offshoring.
The determined effective demand can be generated by the state budget issuing financial streams both on the financial goods market and on the investment goods market. This is very important when determining economic balance and balancing the economic fluctuations. What is more, by taking part of the income from companies and people through the tax system and the way of incurring public debt, the state budget realizes the redistribution of national income. This indicates that the structure of effective demand due to redistribution differs from that which could be observed if these revenues were not taken away by companies and people.
Global effective demand
Traditional sources of economics state that the liquidity of funds by economic entities has no impact on global effective demand, as it mainly concerns income and prices. The growing impact of financial organizations, which cause an increase in the liquidity degree of financial assets of business entities, has transformed the position on this issue: global effective demand is not only dependent on the income generated by business entities, but also on the "portfolio structure" of the selected economic entity and ease of which entity is able to dispose of financial assets as a means of payment. Western literature describes this as the "liquidity position" of an economic entity. " This term therefore means the ability of an economic entity to quickly make payments depending on the liquidity level of the financial assets available.
Creating the conditions for buying or renting housing by the general public is the goal of effective demand. He describes the problem of housing, which is considered as a private good, and effective demand determines the quantity and quality of these apartments. Effective demand on the example of public transport is described by K. Gorzelec and O. Wyszomirski. They point out very simply that effective demand is expressed in the number of people who use public transport in a given period. Effective demand may be transformed into a potential demand, provided that certain conditions related to the expected quantity and quality of services are met.
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- Fahrioglu, M., & Alvarado, F. L. (2000). Designing incentive compatible contracts for effective demand management. IEEE Transactions on power Systems, 15(4), 1255-1260.
- Basu, S., & Bundick, B. (2017). Uncertainty shocks in a model of effective demand. Econometrica, 85(3), 937-958.