Effective Demand in Markets
- AS, A-Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 27 Sept 2020
In this short video we focus on an important concept to help understand the working of the price mechanism – the idea of effective demand
Demand in economics must be effective. Only when a consumers' desire to buy a product is backed up by an ability to pay for it do we speak of demand.
Factors that can increase the level of effective demand in a market
- When wages rise faster than the rate of consumer price inflation leading to higher real incomes
- When state welfare benefit payouts such as the state pension rise more than inflation
- When the cost of credit / loans falls e.g. cheaper mortgages can make housing more affordable
- When new technology / innovation lowers prices leading to higher real incomes
- When the government offer subsidies to producers (lowering their costs) and/or when subsidies are offered to consumers
- When intense competition between firms drives prices lower e.g. during a price war!