Classical Theory of Employment : Classical Theory of Employment Basic Assumptions Slide 2: There is the free market price system.
There is the free market price system.
There is a closed laissez faire capitalist economy.
Wages and prices are flexible.
There is close coordination between money wages and real wages.
Since supply creates its own demand, there can never be any deficiency in demand.
Total output of the economy is divided between consumption and investment expenditures.
Capital stock and technological knowledge are given in the short-run. Say's Law of Markets : Say's Law of Markets Say's law of markets is the core of the classical theory of employment. An early 19th century french Economist, J.B.Say [1767-1882] enunciated the proposition that "Supply creates its own demand".
Production creates market (Demand) for goods:
Barter system at its Basis :
General over production impossible:
Saving Investment Equality:
Rate of interest as a determinant factor:
Labour Market: Propositions and its implications of the Say's law. : Propositions and its implications of the Say's law. Full employment in the Economy .
Proper Utilization of Resources:
Perfect Competition :
Laissez-faire Policy .
Saving as a social virtue Criticisms of Say's Law : Criticisms of Say's Law .M. Keynes in his General Theory of Employment, Interest and Money published in 1936, made a frontal attack on the classical postulates and Say's law of markets. He criticised Say's law of markets on the following grounds.
Supply does not create its Demand.
Self-adjustment not possible.
Money is not Neutral.
Over Production is Possible.
Under employment situation.
Equality through Income.
Wages-cut no solution.
Demand creates its own supply The Principle of Effective Demand (or) Keynes's Theory of Employment : The Principle of Effective Demand (or) Keynes's Theory of Employment In a capitalist economy the level of employment depends on effective demand.
Keynes used the term 'effective demand' to denote the total demand for goods and services at various levels of employment. Different levels of employment represent different levels of aggregate demand.
Aggregate Demand Price "The aggregate demand price for the output of any given amount of employment is the total sum of money of proceeds, which is expected from the sale of the output produced when that amount of labour is employed."
Aggregate Supply Price: When an entrepreneur gives employment to certain amount of labour, it requires certain quantities of co operant factors like land, capital, raw material, etc.
"At any given level of employment of labour aggregate supply price is the total amount of money which all the entrepreneurs in the economy, taken together, must expect to receive from the sale of the output produced by that given numbers of men, if it is to be just worth employing the Determination of Effective Demand: : Determination of Effective Demand: The level of employment is determined at the point where the aggregate demand price equals the aggregate supply price.
It is the point where what the entrepreneurs expect to receive equals what they must receive and their profits are maximized.
This point is called the effective demand and here the entrepreneurs earn normal profits.
This point determines the level of employment and output in the economy.
The point of effective demand is, however, not necessarily one of full employment but of under employment equilibrium. AGGREGATE DEMAND AND AGGREGATE SUPPLY PRICES : AGGREGATE DEMAND AND AGGREGATE SUPPLY PRICES ASP ADP E N N1 Nf R C R1 C1