• 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.