The classical theory emphasizes on full employment condition for the economy to function in a normal situation. Explanation of Classical Theory of Employment: The classical theory of employment is based on the assumption of flexibility of wages, interest and prices. How did Keynes challenge the classical conclusion about income and employment, especially as it referred to the three foundations of classical theory; Say's law, the abstinence theory of interest, and wage-price flexibility? This means that wage rate, interest rate and price level change in their respective markets according to the forces of demand and supply. The fundamental principle of the classical theory is that the economy is self‐regulating. What is the answer of the classical theory regarding this possibility? In classical economics, Say's law, or the law of markets, is the claim that the production of a product creates demand for another product by providing something of value which can be exchanged for that other product.So, production is the source of demand. Assumption of full employment as a normal condition of a free market economy is justified by classical economists by a law known as ‘Say’s Law of Markets’. Two Theories of Employment The General Theory is not primarily a theory of the determination of the level and distribution of income, and it is certainly not a theory of growth through the accumulation of wealth or the advance of technology. (3) Classical Analysis of Price and Inflation. It was the theory on the basis of which classical economists thought that general over-production and general unemployment are not possible. Income and employment theory, a body of economic analysis concerned with the relative levels of output, employment, and prices in an economy. (Based on say's law) (b) The flexibility of the interest and wage rate is the forces to maintain full employment. -The aggregate supply curve is vertical at the full-employment level of output; the aggregate demand curve is stable if the money supply is constant. The key difference between classical and neo classical theory is that the classical theory assumes that a worker’s satisfaction is based only on physical and economic needs, whereas the neoclassical theory considers not only physical and economic needs, but also the job satisfaction, and other social needs.. According to Say's Law: Recession is unlikely since people receive money to produce and the funds they receive _____ be spent to buy other goods. The equilibrium level of income determined by the equality of AD and AS does not necessarily indicate the full employment level. Classical economists such as, J.S. Mill, Marshall, Pigou etc. In order to maximize their profit, firms employ factors of production to the point where margi… Interest rates, wages and prices should be flexible. (C) Say’s law (D) Neutrality of money 3. The classical theory presented by Say’s Law argues that: the income which is not spent on consumer goods and thus saved will totally become investment expenditure. In this view, business cycles are natural processes of adjustment which do not require any action on the part of government. In this economy there cannot be over production … In classical theory the equality between saving and investment is brought about by: (A) Rate of interest (B) Income (C) Consumption (D) Multiplier 4. In the classical economic system, the main of the firms is to maximize profit. The demand for labors and other factor resources are determined by the demand for the products in the market. Money Does not Matter. Haberler is right insofar as he denies the belief of Keynes (and such disciples as Sweezy) that Say's law "still underlies the whole classical theory, which would collapse without it" (General Theory, p. 19). The theory of employment developed by classical economists is called classical theory of employment. and Employment Postulates Always full employment. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands.”“Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. Classical economists assumed full … This means that investment demand (I) will be equal to savings (S), i.e., According to Keynes, the equilibrium levels of national income and employment are determined by the interaction of aggregate demand curve (AD) and aggregate supply curve (AS). CLASSICAL THEORY OF EMPLOYMENT For this theory, French economist J. In the State of Equilibrium. Classical economists maintain that the economy is always capable of achieving the natural level of real GDP or output, which is the level of real GDP that is obtained when the economy's resources are fully employed. CLASSICAL ECONOMICS. Unemployment is a temporary condition and will pass due to the economic situations. Assumptions Laissez faire Non Intervention of the Government Perfect Competition Market Mechanism Consumer and Producers freedom. The say's law is concerned with the real sector or production sector of the economy. Say formulated a law which is known as the “Say's Law of Market”. According to Say’s law, supply creates its own demand. The classical economists believed that:(i) An economy as a whole always functions at the level of full employment of resources. Say's law was a cornerstone of classical economics, and although it was subject to intense criticism by Keynesian economists, ... which then triggers further reductions in production, employment, income, and consumption in a contractionary downward spiral. This belief is based on Say s Law … Say’s Law: Say’s law of markets is the core of the classical theory of employment. CLASSICAL THEORY The classical theory is essentially the laissez faire belief of pure capitalism. -The classical theory of employment is grounded in Say’s Law, the classical interest rate mechanism, and downwardly flexible prices and wages. The classical theory of employment is based on the following principles: (1) Say's Law of Market. Classical Theory Of Income And Employment (HINDI) - YouTube (a) There is existence of full employment of labor and other productive resources. In addition, Say’s Law also helped … Say’s Law: Say’s Law was given by J.B. Say, who was a French economist of early nineteenth century. 46 1. For this, they have to determine the level of output to be produced and the number of workers to be employed. With the help of this law, classical economists justified the assumption of full employment. have supported this law of J.B. Say. Classical theory of employment The classical theory of employment propounded by Ricardo and Adam Smith is based on two broad features. Excess income (savings) should be matched by an equal amount of investment by business. Says Law French economist Jeane Baptiste Say Supply Creates its own demand. Explanation: The classical theory of Income and employment is based on normal conditions of a market which operates economically. B. Classical Theory of Output. 3. (a) Classical Theory of Employment. Apart from aforementioned assumptions, which are assumption of full employment and flexibility of price and wages another important basis for classical theory of employment is Say’s Law. It also depends on the extra unit of output that an additional worker can produce if added to the current workforce. SAY'S LAW Say's law proposes that supply creates its own demand. It was J. M. Keynes who first analyzed the frequent problem of unemployment and fluctuating levels of real output or national income. In 1803, in his book – A Treatise on Political Economy – Say explained:“It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. They are Says law of market and quantity theory of money. (2) Equilibrium in the Labor Market. An early 19th century French Economist, J.B. Say, enunciated the proposition that “supply creates its own demand.” Therefore, there cannot be general overproduction and the problem of unemployment in the economy. 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