Classical theory of employment

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  • 1. Classical Model of Employment Prepared by: Surbhi ; Rudrakshi ; Divyani ; Harleen ; Pooja ; Shubhra. B.Com (PC) Sem V
  • 2. Introduction 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
  • 3. Assumptions Full emmployment Laissez faire Self adjusting Barter system Closed economy
  • 4. Say’s law of market “Supply creates its own demand”  Production creates demand for goods  General over production is impossible  Saving investment equality  Rate of interest as determinant factor  Labour market
  • 5. Say’s law of market Circular flow :
  • 6. Wage price flexibility Classical economist believed in full employment situation In case of unemployment, a general wage cut in money wage to the full employment situation  Demand of labour < supply of labour  Demand falls » fall in demand of labour  Fall in wage rate » rise in demand of labour  Unemployment removed » full employment
  • 7. Labour 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
  • 8. Full Employment Full employment refers to that situation in which at a given level of real wage demand of labour is equal to the available supply of labour. All those people get employment who are willing to work at prevailing wage rate Demand of labour = Supply of labour
  • 9. Determination of employment and output Factors of production: P = f{land,labour,capital,technology} In short run,supply of labour increases therefore production will increased Law of diminishing return: Output increases less propotionately with employment
  • 10. Determination of employment and output Demand & Supply of labour:  Demand increase with decrease In wage rate and vice versa Supply increase with decrease in Wage rate and vice versa
  • 11. Determination of employment Demand of labour = Supply of labour  At real wage rate labour and entrepenuer are in equilibrium  no. of labour willing to supply their labour and gets maximum satisfaction
  • 12. Explanation of Classical Theory  Real wage = money wage  DD < SS{unemployment}  money wage decreases  real wage decreases  demand increases  therefore DD = SS{full employment}
  • 13. Criticism • Underemployment situation • Refutation of say’s law • Overproduction is possible • Long run analysis unrealistic • State intervention is essential • Money is not neutral