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Effective demand
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== Examples of spillovers == One example involves spillovers from the labor market to the goods market. If there is [[labour economics|labour market]] disequilibrium such that individuals cannot supply all the labor they want to supply, then the amount that they are able to supply will influence their demand for goods; the demand for goods, contingent on the constraint on the amount of labor that can be supplied, is their effective demand for goods. In contrast, if there were no labor market [[Economic equilibrium#Disequilibrium|disequilibrium]], individuals would simultaneously choose both their quantity of labor to supply and the quantity of goods to purchase, and the latter would be their notional demand for goods. In this example, the effective demand for goods would be less than the notional demand for goods. Conversely, if there are goods market [[shortage]]s, individuals may choose to supply less labor (and enjoy more leisure) than they would in the absence of goods market [[disequilibrium (economics)|disequilibrium]]. The amount of labor they choose to supply, contingent on the constraint on the number of goods they can buy, is the effective supply of labor. Another example involves spillovers from [[credit markets]] to the goods market. If there is [[credit rationing]], some individuals are constrained in the number of funds they can borrow to finance goods purchases (including [[Durable good|consumer durables]] and houses), so their effective demand for goods, as a function of this constraint, is less than their notional demand for goods (the amount they would buy if they could borrow all they want to). Firms can also exhibit effective demands or supplies that differ from notional demands or supplies. They too can be credit constrained, resulting in their effective demand for goods such as [[physical capital]] differing from their notional demand. In addition, in a time of labor shortage, they are constrained in how much labor they can employ; therefore the number of goods they choose to supply at any potential goods price—their effective supply of goods—will be less than their notional supply. And if firms are constrained by [[excess supply]] in the goods market, limiting how much goods they can sell, then their effective demand for labor will be less than their notional demand for labor. The excess demands in different markets can influence each other. The presence of excess demand in one market influences effective demand or supply in another market, which may influence the degree of disequilibrium in the latter market; in turn, the constraints imposed on participants in that market influence their effective demand or supply in the former market.
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