What defines effective demand?

Effective demand is defined as not just the desire for a product but also the availability of the financial means to make that purchase. This concept emphasizes that for demand to be effective, it needs to include both a consumer's willingness to buy and their capability to pay for a good or service. This is a critical factor in economics, because many individuals may desire a product, but without the financial resources to obtain it, that desire does not translate into market demand.

Understanding effective demand is essential for appraisers as it helps them assess the market's behavior accurately. For example, if a property has high desirability in a prime location but potential buyers lack the financial means to purchase it, the effective demand for that property may be low.

While total market demand might indicate how many people want a good, it doesn't account for their economic capability. Similarly, willingness to pay captures part of the concept, but without the actual purchasing power, it remains theoretical. Overall economic stability is a broader factor that can influence demand but is not a specific component of effective demand itself. Therefore, the most accurate definition focuses on the combination of desire and the ability to pay, which is precisely what defines effective demand.