<p>In economics, we are mostly interested in studying how incentives shape decisions. In many situations, there is a gap between the concept that captures the incentives that a person is facing, and the name it receives in the real world. For example,  in general, wages are what provide incentives for people to work. However, most people pay taxes or have other deductions. Therefore you can define the "effective wage" as the money the person gets to keep after taxes are taken out, etc. Now, the effective wage is really what is shaping the decisions of the person. </p>

<p>As you can see, the use of "effective" can vary a lot from topic to topic, but it almost always refers to some adjustment in the variable so that it really captures the incentives agents are facing.</p>

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2020-03-22T17:29:27.190Z
2020-03-22T17:29:27.190Z
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<p>I've seen the terms "effective demand" and "effective wages" bandied about in papers, but I'm not sure what these refer to. Please could someone explain both these concepts? Thanks!</p>

<economic-terms>
Use of the term "effective" in economics
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# Use of the term "effective" in economics

(Asked by: username_0 on 2020-03-22)

I've seen the terms "effective demand" and "effective wages" bandied about in papers, but I'm not sure what these refer to. Please could someone explain both these concepts? Thanks!

**Tags:** economic-terms

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## 1 answers

### Answer by username_1 on 2020-03-22. Score: 5 | Accepted answer

In economics, we are mostly interested in studying how incentives shape decisions. In many situations, there is a gap between the concept that captures the incentives that a person is facing, and the name it receives in the real world. For example, in general, wages are what provide incentives for people to work. However, most people pay taxes or have other deductions. Therefore you can define the "effective wage" as the money the person gets to keep after taxes are taken out, etc. Now, the effective wage is really what is shaping the decisions of the person.

As you can see, the use of "effective" can vary a lot from topic to topic, but it almost always refers to some adjustment in the variable so that it really captures the incentives agents are facing.


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