Effective Demand - Definition & Meaning
What is Effective Demand?
Effective Demand is the quantity of a good or service that the consumers are actually buying at the current market price. It is the notional demand excluding the latent demand.
Notional demand is the demand that happens when purchasers are not controlled in any other market and includes what customers' want to have and not what they can afford. For example, notional demand is high for fast sports cars, although only a few people can afford this sort of high price purchase.
Effective demand is the the demand for a product or service which occurs when purchasers are constrained by financial capability, government regulation etc. Thus, in the case of the sports car, effective demand might be measured by the actual number of sports cars sold at a certain price during a particular period. Thus, effective demand becomes:
Effective Demand = Notional Demand - Latent Demand
Effective Demands are generally less that Notional Demand because of the spillovers from other markets - a shortage or surplus of demand or supply of a product or service. For example, in the case of the sports car, one of the reasons why people might not be able to buy a sports car despite latent demand is the shortage of cheap loans from the financial market. If such loans were available, people would buy the sports car, and this latent demand would have been counted as effective demand.
Often, success or failure of a company depends on how accurately it is able to predict the effective or actual demand for its product or service.
Hence, this concludes the definition of Effective Demand along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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