CH. 3 THE PRINCIPLE OF EFFECTIVE DEMAND 25

preneurs will endeavour to fix the amount of employ-ment at the level which they expect to maximise theexcess of the proceeds over the factor cost.

Let Z be the aggregate supply price of the outputfrom employing N men, the relationship between Z andN being written Z =„ϕ(N), which can be called theAggregate Supply Function.1 Similarly, let D be theproceeds which entrepreneurs expect to receive fromthe employment of N men, the relationship betweenD and N being written D = ƒ(N), which can be calledthe Aggregate Demand Function.

Now if for a given value of N the expected proceedsare greater than the aggregate supply price, i.e. if D isgreater than Z, there will be an incentive to entre-preneurs to increase employment beyond N and, ifnecessary, to raise costs by competing with one anotherfor the factors of production, up to the value of N forwhich Z has become equal to D. Thus the volumeof employment is given by the point of intersectionbetween the aggregate demand function and the aggre-gate supply function; for it is at this point that theentrepreneurs’ expectation of profits will be maximised.The value of D at the point of the aggregate demandfunction, where it is intersected by the aggregatesupply function, will be called the effective demand.Since this is the substance of the General Theory ofEmployment, which it will be our object to expound,the succeeding chapters will be largely occupied withexamining the various factors upon which these twofunctions depend.

The classical doctrine, on the other hand, whichused to be expressed categorically in the statement that“Supply creates its own Demand” and continues tounderlie all orthodox economic theory, involves aspecial assumption as to the relationship between thesetwo functions. For “Supply creates its own Demand”

1 In Chapter 20 a function closely related to the above will be calledthe employment function.