THE CLASSICAL THEORY OF EMPLOYENT subtitle style Click to edit Master

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Classical Analysis
Adam Smith, David Ricardo, J. B. Say Long term Analysis Supply Oriented Efficient Allocation of Resources Existence of Full Employment: Frictional,

Voluntary exist

Little emphasis on demand side Concerned with the different types of

Goods and Services to be produced

4/15/12 Relative price structure of different goods

Says Law of Market

Supply creates its own demand Production of output generates purchasing

power

Productive process has two effects: A) Employment of FoP ; Income stream is

generated market

B) Resultant Output is supplied to the Two main Propositions: Production is the sole cause of4/15/12 demand

Assumptions:
Optimum Allocation of Resources Perfect Equilibrium: D and S Perfect Competition: Com.( AR= AC) and

Factor Market
Market Economy: Free enterprise Laissez- Faire: Economic field Elastic Market: Market expands with

Increase in output
Market Automatism: Increase in Population

is absorbed

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Implications of the Law

Automatic attainment of full employment:

Free economy intervention

Self- adjusting mechanism: No Govt. No deficiency of aggregate demand No general unemployment: No

overproduction
Price-Wage Flexibility: Involuntary

unemployment cured by wage cut

Automatic resource adjustment and

4/15/12 utilization: New doesnt supplant the old

Price Wage Flexibility

If Savings AD

Consumption Expenditure as (Y= C+ S) ( AD= C+I+G) Thus Price AD

The surplus output will be cleared off the

market

The classicist believed that when S

Price

but O
Sellers will not tolerate falling prices for

long

They will bring down their CoP by

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Wages

Some labourers will refuse to work at lower