Classical Model of Employment

Prepared by:

Surbhi ; Rudrakshi ; Divyani ;

Harleen ; Pooja ; Shubhra.

B.Com (PC) Sem V

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

Introduction

Full emmploy

ment

Barter system

Closed economy

Self adjusting

Laissez faire

Assumptions

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

Say’s law of market

Circular flow :

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

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

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

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

Determination of employment and output

Demand & Supply of labour:

Demand increase with decrease

In wage rate and vice versaSupply increase with

decrease in Wage rate and vice versa

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

Explanation of Classical Theory

Real wage = money wage DD < SS{unemployment} money wage decreases real wage decreases demand increases therefore DD = SS{full

employment}

Criticism• Underemployment situation• Refutation of say’s law

• Overproduction is possible• Long run analysis unrealistic

• State intervention is essential

• Money is not neutral