effective demand

Demand and Supply Curves: Effective Demand

In A‑Level Economics, effective demand is the amount of a good that consumers are willing and able to buy at a given price, after all economic forces have settled. It’s the “real” demand that actually shows up on the market.

1️⃣ What is Effective Demand?

Imagine a crowded dance floor. People (consumers) want to dance (buy a product). The number of people who actually get onto the floor at a certain music tempo (price) is the effective demand. It’s not just how many want to dance, but how many can actually join given the music, the crowd, and the dance floor size.

2️⃣ How to Find It

  1. Start with the demand schedule – a table of quantities demanded at different prices.

  2. Plot the points on a graph with price on the vertical axis and quantity on the horizontal axis.

  3. Connect the dots to form the demand curve (downward sloping).

  4. Identify the market equilibrium where the demand curve intersects the supply curve.

  5. The quantity at this intersection is the effective demand.

3️⃣ Key Formulae

  • Demand curve: \$Qd = a - bP\$ (where \$Qd\$ = quantity demanded, \$P\$ = price, \$a\$ and \$b\$ are constants)

  • Supply curve: \$Qs = c + dP\$ (where \$Qs\$ = quantity supplied, \$c\$ and \$d\$ are constants)

  • Equilibrium: \$Qd = Qs \;\Rightarrow\; a - bP = c + dP\$

  • Effective demand (equilibrium quantity): \$Q^* = \dfrac{a - c}{b + d}\$

4️⃣ Real‑World Example: Smartphones

Suppose the demand for a new smartphone is given by \$Qd = 500 - 2P\$ (prices in \$1000s). The supply is \$Qs = 100 + 3P$. To find the effective demand:

Price (\$P\$)Demand \$Q_d\$Supply \$Q_s\$
0500100
100300400
200100700

Solve \$500 - 2P = 100 + 3P \;\Rightarrow\; 5P = 400 \;\Rightarrow\; P^* = 80\$. Plug back: \$Q^* = 500 - 2(80) = 340\$. So the effective demand is 340 units at a price of $80,000.

5️⃣ Why It Matters

Effective demand tells us how many units will actually be sold in a competitive market. It helps businesses decide production levels, and it shows policymakers how changes in taxes or subsidies can shift the market.

6️⃣ Quick Quiz

  1. Draw a demand curve that slopes upward. Is this realistic? Why or why not?

  2. Given \$Qd = 300 - 4P\$ and \$Qs = 50 + 5P\$, calculate the effective demand.

  3. Explain how a price ceiling below \$P^*\$ affects effective demand.

Use the formulas above to solve the second question and think about the consequences of a price ceiling in the third.