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Classical Theory of Employment

Classical economists believed that full employment was the normal state of the economy and any deviation from full employment was abnormal. They believed that economic systems automatically tend toward full employment through Say's law that supply creates its own demand, making overproduction impossible. According to classical theory, the level of output and employment are determined by the production function and demand and supply for labor, with diminishing marginal returns. Unemployment could be cured through a general wage cut that would bring the economy back to full employment equilibrium through flexibility of wages and prices in the labor, money, and goods markets.

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280 views

Classical Theory of Employment

Classical economists believed that full employment was the normal state of the economy and any deviation from full employment was abnormal. They believed that economic systems automatically tend toward full employment through Say's law that supply creates its own demand, making overproduction impossible. According to classical theory, the level of output and employment are determined by the production function and demand and supply for labor, with diminishing marginal returns. Unemployment could be cured through a general wage cut that would bring the economy back to full employment equilibrium through flexibility of wages and prices in the labor, money, and goods markets.

Uploaded by

Indu Gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Classical theory of

employment

Bhawna
Rajora
117510

The classical economists


believed in the existence
of full employment in the
economy. To them, full
employment was a
normal situation and any
deviation from this
regarded as something
abnormal. the tendency of
the economic systems is
to automatically provide
full employment.

ASSUMPTIONS

Says law of market


Core of classical theory
Supply creates its own demand
Overproduction is not possible

Determination of output &


employment
O/P & employment determined through production
funtion &
Demand & supply of labor
Precise relation b/w total o/p & amount of employment
i.e. no. of worker

Diminishing Marginal operates

Wage Price Flexibility


Classical economist believed in full
employment situation
In case of unemployment, a general
wage cut in money wages would take
the economy to the full employment
situation

Labor Market
Equilibrium
Demand & supply of labour is function
of wage rate
Demand for labour is decreasing
function of wage rate
Supply of labour is increasing function
of wage rate

Money Market
Equilibrium
General Price Level in the economy
depends on the supply of money
Total supply of money equals total
value of output
Changes in supply of money causes
proportionate change in price level

Goods Market
Equilibrium
Saving equals Investment
Saving & Investment both Are the
function of interest rate
If Interest Rate is high there will be
more saving and less investment

Criticism
Underemployment situation

Money not neutral

Refutation of wage cut

State intervention is essential


Over production is possible

Refutation of says law


Long run analysis unrealistic

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