Economic presented sliede by the discover

1. S.Y.B.Com.
(Semester – III)
Sub:- Business Economics (Macro)
Presented by,
Dr. Madhuri Vartale NET,PGDF.T.,M.Phil.,PhD.
Dr. D. Y. Patil Arts, Commerce and Science College, Pimpri, Pune
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Unit - 3
The Classical Theory of Employment
The classical theory of
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2. KEY CONCEPTS OF THE THEORY
• Say‟s law of Market
• Full Employment
• Laissez fair Policy
• Labour Market Equilibrium
• Capital Market Equilibrium
• Money Market Equilibrium
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The classical theory of
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3. INTRODUCTION
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 The classical economists hypothesized that a free
enterprise economy would always tends toward
full employment.
 The economy should adopt a policy of laissez faire
(non-interference of the government)
 The classical economists follows the Adam Smith‟s
Doctrine (invisible hand concept)
The classical theory of
EmploymentS.Y.B.Com

4. TWO BASIC CONCEPTS OF THE THEORY
1. The Say’s law of Market:-
“Supply creates its own demand”, its mean that an
increase in production automatically increases
money income and there is no overproduction(excess
supply) or under consumption (shortage in demand)
because supply creates its own demand.at the same
value.
2. Wage-Price Flexibility and Full Employment:-
According to the classical economists, there is no
possibility of involuntary unemployment in a
capitalist economy. All those who were willing to
work will get jobs at the existing market wage rate.
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The classical theory of
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5. FULL EMPLOYMENT
• Spencer says, ”Full employment is a situation in which
everyone who wants to work is working except those
who are frictionally and structurally unemployed.”
• Frictional Unemployment:- It is a temporary phase of
unemployment in a dynamic economy. It occurs due to
immobility of labour, shortage of raw material, shortage
of power, breakdown of machinery etc.
• Structurally unemployment :- It is a direct result of mis-
match of work and work skill. There are many problems
like shortage of supply of factors of production. It could
be happen in long run period.
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6. FULL EMPLOYMENT
• Lerners says, ’Full employment is a situation in which
all those who are able to and want to work at the
existing rate of wage jet work without any undue
difficulty.’
• Hansen,’ Full employment implies absence of
involuntary unemployment (involuntary unemployment
means people are ready to work at existing wage rate
but they do not get the jobs).’
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7. ASSUMPTIONS OF THE THEORY
 Capitalist closed economy.
 Classical theories are believed in long run period without inflation.
 There is full employment situation.
 Perfect competition in labour market, money and product markets.
 There are homogeneous labours. Ready to work at the existing wage
rate.
 The total output of the economy is parts of consumption and
investment expenditure.
 Money is the medium of exchange.
 No technological change.
 Prices and wages are flexible in nature.
 Saving is equal to investment.
 The law of diminishing marginal returns is applicable to agriculture
sector.
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The classical theory of
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8. Labour Market Equilibrium
• When labour market is in
equilibrium , we can
determine the level of
employment and the real
wage rate.
• Supply of labour
increases when the raise
in wage rate.
• The full employment
prevails at the
equilibrium real wage
rate.
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9. OUTPUT DETERMINATION
• Section (A) of the figure shows
Labour Market equilibrium in
the classical model. [Sufficient
wage flexibility ensures that
demand for labour is equal to its
supply.]
• Section (B) shows the output
determination at the full
employment level. [with fixed
capital stock and unchanged
technology, The total output at
full employment is equal to
equilibrium value of national
income.]
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10. OUTPUT DETERMINATION
• Full employment is a general characteristics in a capitalist
economy.
• Level of employment refers to equilibrium of demand and
supply of labours in the economy.
• Production is function of number of labours.
• Equilibrium level of aggregate output and employment is
given by production function and labours demand and
supply function respectively.
• Saving is equal to the investment, so unemployment for short
period in the economy, but it can adjusting forces and restore
full equilibrium.
• Aggregate demand is equal to aggregate supply(Full
employment level)
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The classical theory of
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11. OUTPUT DETERMINATION
• W/P
In classical model, employment depends on real wage
rate. The ratio of nominal wage rate to the general price level.
Where, W- nominal wage rate
P – general price level
The classical economists assumed perfect competition and
diminishing marginal returns to scale. So the firm will reach the
point of optimal purchase of labour by equating MPl with the
real wage rate.
W/P= MPl (marginal productivity of labour)
[as shown in the figure.] till full employment position
achieved.
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12. CAPITAL MARKET EQUILIBRIUM
• In the classical model
change in the rate of
interest tends to change
in savings and
investment and ensures
at full employment
position.
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13. MONEY MARKET EQUILIBRIUM
(FISHER QUANTITY THEORY OF MONEY)
• This theory expresses how the supply
of money determines the aggregate
price level in the economy.
• MV=PT
• M= the quantity of money
• V= velocity of circular money
• Y= aggregate income (GDP)
• P= the aggregate price level
• The classical economists assumed that
the aggregate output(Y) remains
constant in short run due to
assumption of full employment,
constant technology, price-wage
flexibility.
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14. MONEY MARKET EQUILIBRIUM
(FISHER QUANTITY THEORY OF MONEY)
The effect of an increase in the
money supply
• If money supply increases
from m1 to m2 (velocity
remains constant)
• Aggregate demand
increases from AD1 to
AD2 .
• As a result, Aggregate
output remains constant
at Yf
• Inflation is a purely
monetary phenomenon.
• Money has a neutral effect
on real variables.
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AS
AD2 =m2v
AD1=m1v
Aggregate output
Y f
o
A
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g
r
e
g
a
t
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p
r
i
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e
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e
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The classical theory of
EmploymentS.Y.B.Com

15. IMPLICATIONS OF CLASSICAL THEORY
• importance to full employment
• Involuntary unemployment is absent
• Under perfect competition general unemployment is not possible.
• Decrease in Money wages tends to decrease the real wages also.
• Wage and price flexibility occurs according to the Say’s law of
Market.
• Due to say’s law of market , there is no overproduction and general
unemployment issues.
• People spend their entire income on consumption and investment
• Savings are equal to investment
• Rate of interest can be changed as accordance to equalize he savings
and investments
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16. CRITICISM ON CLASSICAL THEORY
• Prof. J.M.Keynes wrote „General Theory of employment, rate
of Interest and Money‟ in 1936. In this book he, criticized on
the classical theory of Employment and strongly clash with
Say‟s law of Market.
• Keynes argued that during depression , Say‟s law does not
work.
• According to Keynes, equilibrium income and full
employment income are not the same thing.
• Keynes also criticized on Pigoue‟s approach regarding wage
cut. He trust on involuntary unemployment arises due to
deficiency of demand due to fall in income of the labors.
• The determination of aggregate output and employment level
called as general equilibrium.
• He rejected laissez fair policy
• He believes in short run so criticized that the theory ignored
problems in short period.
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