Upload
nidhi-varshneya
View
17.402
Download
2
Embed Size (px)
DESCRIPTION
Citation preview
• The entire classical theory depends upon the Say’s law of market.
• According to Sir J.B.Say, “Supply creates its own demand”.
• Economy always work on full employment level. This is so because economy keeps on employing the unutilized resources.
• There is no scope for voluntary unemployment.
• The wage flexibility helps in maintaining the full employment level in an economy.
• The mechanism of interest rate flexibility brings about the equilibrium between the savings and investment.
• Equilibrium is established through market mechanism.
• Therefore, there is no need for state intervention.
Pillars of classical theory
• Equilibrium in labour market-wage flexibility
• Money market
• Goods and services market
Essence of classical economics: The aggregate production function:
• Y=F(K,N) Y=National Income K=Fixed Capital N=Labour In the classical model,
employment and output are determined by the factors operating on the supply side of labour market.
• Production is the only source of demand• Production does not depend on AD only
but also on prices.• Deficiency in AD will be made up by
changes in prices.• With a fall in wages of labour all
workers will get employment.• Voluntary unemployment vs involuntary
unemployment vs policy implication.• Govts. & trade unions are responsible
for unemployment.
_ Agg. Supply curve depends on Physical and Technical conditions of production.
• More labourers will be employed only if the entrepreneurs expect to receive greater revenue so as to cover rise in costs.
• In times of recession agg. demand should be raised so that equilibrium be achieved at higher levels.
• Increase in agg. demand will lead to inflation after full employment has already been achieved.