Classical theory of employment


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Classical theory of employment

  1. 1. Classical Model of Employment Prepared by: Surbhi ; Rudrakshi ; Divyani ; Harleen ; Pooja ; Shubhra. B.Com (PC) Sem V
  2. 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. 3. Assumptions Full emmployment Laissez faire Self adjusting Barter system Closed economy
  4. 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. 5. Say’s law of market Circular flow :
  6. 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. 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. 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. 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. 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. 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. 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. 13. Criticism • Underemployment situation • Refutation of say’s law • Overproduction is possible • Long run analysis unrealistic • State intervention is essential • Money is not neutral