What is Demand-Side Economics?

Supply and Demand Cartoon
Supply and Demand Cartoon

As a venture capital firm, Effi Enterprises seeks out emerging businesses that are in need of the funding necessary to grow into a thriving, public company.  These early-stage companies have extreme potential for improvement, but assistance from a firm like Effi Enterprises is all they lack.  In exchange for equity in the company, venture capital firms will invest large amounts of financial capital into the startup to give it the boost necessary to become successful.  In demand-side economic theory, the government must take action to stimulate the economy when it is need and give it the necessary boost for recovery.

Introduction to Demand-Side Economics

Demand-side economics is an economic theory characterized by the idea that economic growth will be created by increasing the demand for goods and services.  Also known as Keynesian economics, demand-side economics strives to stabilize the economy through using government intervention.  To stimulate the economy, demand-side economics suggests the government should lower taxes on the middle and working class and increase government spending.  To prevent inflation, the government should raise taxes and reduce their spending.  Proponents of demand-side theory believe that when the economy is in a recession or economic downturn, the government should step in and take action to stimulate it.

History of Demand-Side Economics

Demand-side economics originates from the ideas of John Keynes and his Keynesian economic theory that the total spending in the economy, or aggregate demand, is the primary driving force behind the economy.  Keynesians maintain that employers will not employ workers to produce goods that cannot be sold and believe unemployment results from an insufficient demand for goods and services.  If people are not spending enough money, jobs will be cut.  The government has the ability to directly affect the demand in an economy by altering tax policies and public spending.

How Does Demand-Side Economics Work?

When there is a recession, economic growth declines and unemployment rises.  In the economic downturn, unemployed individuals spend less money and employed people are cautious with spending in fear of not having money in the future.  As less money is spent, the economy is not stimulated, and the recession continues.  Demand-side economics advocates for the government to intervene in this scenario to help promote spending.  In this case, Keynesian economics suggests that tax rates should be lowered to allow consumers to spend more.  It is stressed that tax rates should be lowered for the middle and working classes because they are more likely to spend that money on consumer goods, while the wealthiest class is more likely to invest.  Also, government investment in infrastructure should be increased and interest rates must be lowered.  When interest rates are high, people have the incentive to save their money.  In lowering interest rates, individuals might be able to afford more consumer goods than before. The government has suffered a loss of revenue from these policies and so as the economy recovers in demand-side economics, taxes may be increased to offset that loss.  Many opponents to demand-side believe the government should have no intervention in the free market and the economy should be left to recover on its own.  They also object to the revenue lost by the government’s efforts to stimulate the economy as it is left to the future citizens to offset.

Demand-side economics stresses the importance of driving the economy to growth by controlling the demand, or total money spent in an economy.  Government intervention is necessary to keep the economy stable and in times of economic downturn, spending should be encouraged as crucial to stimulation and saving should be discouraged as it leads to less growth in the economy and adds to the problems already existing within the economy.

Published by Efraim Landa

My name is Efraim Landa I am an entrepreneur and an expert in venture capital. I am the co founder of Effi Enterprises, a venture capital firm as well as the co founder and CEO of Gluco Vista, a company that is in the process of developing a non invasive glucose meter for those with diabetes.

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