1. The effective demand is determined by consumption and investment expenditures.
2. The consumption function depends on the income of the people and marginal propensity to consume.
3. According to Keynes, if income increases, consumption will also increase but by less than the increase in income.
4. The rate of interest and marginal efficiency of capital determine the investment levels.
5. Rate of interest depends on money supply and liquidity preference.
6. Liquidity preference is based on transaction motive, precautionary motive and speculative motive.
7. Marginal Efficiency of Captial depends on Prospective yield of capital asset and supply price of capital.

Introduction
The starting point of Keynes theory of employment and income is the principle of effective demand.
Meaning
Effective demand denotes money actually spent by the people on products of industry. The money which entrepreneurs receive is paid in the form of rent, wages, interest and profit. Effective demand = national income.
Explanation
Effective demand signifies the money spent on consumption of goods and services and on investment. The total expenditure is equal to the national income, which is equal to the national output.
The relationship between employment and output of an economy depends on the level of effective demand
Effective Demand = Y= C+ I = Output = Employment
Effective demand determines the level of employment. When effective demand increases, employment will increase and vice versa

i. The classical economists always believed in the existence of full employment in the economy.
ii. To them full employment was a normal situation and any deviation from this was regarded as something abnormal.
iii. According to Pigou, the greatest exponent of the classical view, the tendency of the economic system was to automatically provide full employment in the labour market.
iv. Full employment exists “when everybody who at the running rate of wages wishes to be employed”.
v. Those who are not prepared to work at the existing wage rate are not unemployed in the Pigovian sense because they are voluntarily unemployed.
vi. There is, however, no possibility of involuntary unemployment in the sense that people are prepared to work but they do not find work

(a) Kumar is cyclically unemployed. He has lost his job as a result of the general economic recession.
(b) Sathish is frictionally unemployed. Job openings exist for him. It is merely a case of tracking down a position.
(c) Latha is structurally unemployed. Unemployment due to technological change in an industry is classified as structural.
(d) Devi, is frictionally unemployed. Job openings exist for her.

Assumption of the Say's law of market:
(i) No single buyer (or) seller of commodity or an input can affect price.
(ii) Full employment.
(iii) People are motivated by self interest and self-interest determines economic decisions.
(iv) The laissez fair policy is essential for an automatic and self adjusting process full employment.
(v) There will be a perfect competition.
(vi) There is wage - price flexibility.
(vii) Money acts only as a medium of exchange.
(viii) Long run analysis.
(ix) There is no possibility for over production or unemployment.
(x) Unutilized resources used until reaches full employment.
(xi) No Government intervention automatic Price adjustment mechanism operated.

Introduction
Under the Keynes theory of employment, a simple two sector economy consisting of the household sector and the business sector is taken to understand the equilibrium between ADF and ASF.
Explanation
1. AD and AS reach equilibrium at E. The employment level is N_o
2. At ON₁employment, the aggregate supply is N₁R₁. But the aggregate demand is M₁N₁.
3. The expected level of profit is M₁R₁.
4. To attain this level of profit, entrepreneurs will employ more labourers, till they reach point E i.e. ON_o.
5. Beyond ON_o, the aggregate demand curve is below the aggregate supply curve showing loss.
6. So they will never employ more than ON_o labour.
7. The equilibrium level of employment need not be the full employment level (N_o).
8. The difference between N_o - N₁ is the level of unemployment.
Conclusion
Thus the concept of effective demand becomes significant in explaining the under employment equilibrium.