ELI5: Explain Like I'm 5

Effective demand

Effective demand is very similar to something you might already know – it's like when you ask your parents to buy you a toy or a treat. But, there are some important differences.

When you ask your parents for a toy or a treat, you are showing a desire for something. Effective demand is like that, but it's more than just a desire. Effective demand is when someone not only wants something, but they have the money or resources to actually buy it.

For example, let's say there are 10 kids who want ice cream. That's called "potential demand." However, if only 5 kids actually have the money to buy the ice cream, then that's "effective demand."

Effective demand is important in economics because it helps businesses know how much of a product they should make and sell. If there isn't enough effective demand, the business won't make enough money and might go out of business. On the other hand, if there is a lot of effective demand, the business will make more money and might be able to grow and expand.