1. Classical View of Employment
 Classical economists believe that full employment is a normal
situation and unemployment is rare exception.
 Based on leissez fair policy and any govt. intervention create
instability in the system.
 Unemployment is a temporary phenomenon
 Thus unemployment is a self correcting mechanism

2. Says Law of Market
• “Supply creates its own demand”
• There cant be the problem of over production
or under production,
• Symbolically,
ΔO= ΔY= ΔE

3. Assumptions
 Perfect competition in both factor market and
product market
 Optimum allocation of resources
 Size of market is capable of expansion
 Amount of labor and capital ca be raise in the market
economy based on price mechanism
 Govt. adopts hands off or non-intervention policy
 Savings are automatically invested

4. Concept of full employment
ΔI
ΔExp
ΔProd
ΔY
ΔCons.
ΔY

5. Equilibrium in labor market
Demand for labor
It shows the inverse relationship between real
wages and employment
W=P.MPPN
W= money wage,
P= general price level
MPPN= marginal physical product of labour

7. Supply of Labor
• It shows the direct relationship between real
wages and employment

8. Equilibrium in labor market

9. Equilibrium in Product Market
Saving Function
It shows that there is a direct relationship
between rate of interest and saving

10. Investment Function
It shows the inverse relationship between rate
of interest and investment

11. Equilibrium