Keynes' Concept of "Effective Demand"

• Level of demand for output that businesses can expect to sell at a profit

  • Employment will vary with output (GDP).

  • GDP will vary largely with investment spending by firms (I).

  • Investment spending by firms will vary largely with expectations as to

    • ... future profitability of sales resulting from investment spending

  • Hence, employment will vary largely with effective demand.

        "[E]ffective demand drives labour demand.  Firms hire the number of 
        workers they need to produce the amount of output they think they 
        can sell at a profit." (Macro, 164)

• The general theory of employment