Classical theory assignment help
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Classical theory assignment help

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  • 1. Classical theory
  • 2. History / system before classical theory : mercantilism The beliefs of this system was: Wealth of nation is measured in terms of precious metals There Is need of government to direct the development of capitalist system.
  • 3. What are the measures taken : Increased exports and decreased imports to increase foreign currency. Increase export subsidy and import duties Export of gold was prohibited. ROLE OF GOVERNMENT  To make the country self sufficient so that imports can be reduced and exports can be increased To ensure that market existed for all goods To encourage the consumption
  • 4. Main features of classical theory Free market economy should operate as it brings equilibrium on its own. Equilibrium exist only at full employment level. There is no involuntary unemployment Wealth of the nation should be measured in real terms like output. Output is determined by labor, fixed capital and fixed technology. Money has no intrinsic value. It act only as a means of exchange. Hence, increase in money supply will not change any real factor in the economy. Government has no role to play. Rather it was
  • 5. How output is determined Output is a function of labor and capital. In short run, capital is assumed to be constant. So, the level of employment determines the level of output. level of employment is determined by the demand and supply factors.
  • 6. Production function
  • 7. It is assumed that output can be increased by additional worker at the same rate at low level of employment. this is shown by straight line and termed as constant returns to scale As more labor are hired with same level of capital, additional output by each worker starts falling. This makes production function flatter. This tells that output is rising but at decreasing rate. Then we have negative returns to scale as the output starts falling. That is the additional worker reduce the total output. Firm will never operate on that part.
  • 8. Marginal productivity It is the addition to total output by additional labor. MPn= change in output/ change in labor. slope of production function indicates marginal productivity of labor. As more and more labors are hired, MPn starts falling. Initially it falls but remain positive. But afterwards it become negative.
  • 9. How the level of employment is determined It is determined by labor demand and labor supply. LABOR DEMAND Labor is demanded by the firms which employ that level of labor that maximize their profit. In the perfect competition, profit is maximized at a level where the marginal cost is equal to the price. MC = P Mc is the cost of producing extra unit. Thus equal to money wage/ MPn
  • 10. It should equate to price. Thus P = W/ MPn w/p = MPn This equation gives the labor demand curve Real wage
  • 11. Labor supply Labor is supplied by individual in the economy who try to maximize their real income i.e. the amount of consumption and leisure. There is a trade of between these two goods. As income will rise by increasing labor hour and reducing the leisure. CONSTRUCTION OF LABOR CURVE 24 * REAL WAGE1 24 * REAL WAGE2 REAL WAGE2> REAL WAGE1
  • 12. WAGE RATE measures the opportunity cost of leisure. Higher the wage rate, higher the opportunity cost. So, labor supply will increase with the increase in real wage rate.
  • 13. Intersection of both the curves determine the equilibrium real wage rate and employment level.
  • 14. Equilibrium level of output N*
  • 15. Aggregate supply curve This curve establish a relationship between price and quantity. In an economy if price rises, the firm will try to increase the output. But as we know the supply of labor is constant. Every firm will try to hire more worker , they will increase money wage so as to bid workers away from other firms. Firms which cannot increase the wages lose their workers. This process will continue till money rise in equal proportion to prices. Graphically, Increase in prices leads to rise in labor demand , shifting the Nd rightwards. Also, the real wages falls thus shifting the labor supply backwards.
  • 16. Money wage labor labor Real wage Labor supply Labor demand Ls (3 P1) Ls ( 2P1) Ls( P1) Nd *P1 Nd* 2 P1 Nd* 3 P1
  • 17. Aggregate demand curve it has been derived from Fischer equation Money demand= k p.y where k= 1/v money demand= money supply Ms= k P.Y P= Ms/ kY
  • 18. Determination of output, labor and wages
  • 19. For further Info : http://www.myassignmenthelp.net +1-617-874-1011 (USA) +44-117-230-1145 (UK) +61-7-5641-0117 (AUS) support@myassignmenthelp.net http://www.myassignmenthelp.net/rss.xml http://myassignmenthelp. net/Assignment_Help_Podcasts/Poderator.xml