Classical theory of employment
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Transcript of Classical theory of employment
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