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Craig Kuepper

Economics 2020-401

Classical vs Keynesian Economics


I would love to help explain the classical and Keynesian models so that you can

make an informative decision. Voting is a great responsibility that everyone needs to

take very serious.

Classical economics is one of the first attempts to understand the gross domestic

product of a nation. The model also covers employment, prices, consumption etc. The

main assumption with the classical model is that prices and wages are flexible in nature.

Having flexible pricing means that the price will adjust in the long run when there is a

shortage or a surplus in the economy. This model also assumes that markets are

competitive throughout an economy making it so that prices can be flexible. Another

main point in the classical model is what the book calls the Say’s law. The main premise

of the Say’s law is that the nation produces a certain amount of real gdp, and also

produces the necessary income to purchase the goods that are produced. In essence

when the goods are produced it also produces the demand to buy the goods that were

produced. I don’t know that I wholly agree with this because some goods are created

and never used. This is one of the main reasons businesses fail to succeed. Either the

business doesn’t do enough for the business or people don’t want or need the product. I

do think that it is cool that it implies that people in an economy make a good because

they want another good. This implies that trade is a natural and inherit thing within a

society. Within this classical view it is also seen that as a product has surpluses prices

will fall and even out the surplus


Says law

This graph shows the supply and demand in a real simple nature. This shows

what was described above as supply fuels the demand and it circles around. One of the

big assumptions of the classical model is that pure competition exists in the economy.

Pure completion is where there is no single buyer or seller of a product that can affect

the price of the product. Another major aspect of the classical model is that the people

are motivated by their own self-interest. This means that each person in the economy

wants to maximize the profits that they can earn. The thing that I found the most

interesting was that the people of the economy aren’t fooled by the “money illusion.”

The money illusion is where the people of the economy can’t be tricked into thinking that

they are doing great if their money doubles when the inflation has made the price of

goods double as well. These are some of the major assumptions that take place in the

classical model of the economy. When dealing with the classical model of economy, this

model teaches that the role of government in the economy should be minimal. This
stems from earlier when I mentioned that the supply fuels the demand, so the economy

fixes itself with time.

The classical model believes that saving is not an issue with the simple model

because any amount that is saved within an economy is reinvested into different

businesses. This makes it so planned savings and planned investment reach an

equilibrium, which leaves no concern for leaking of saving. The same thing happens in

the labor market under the classical model. If there is too many workers the wages will

be increased making it so that fewer workers are put to work which creates another

equilibrium. The aggregate supply is vertical because of all the basic principles describe

above. The great thing about this model is that the economy is at or moving towards full

employment at all times. These are a few things associated with the classical model. I

will next describe the Keynesian model.

The Keynesian model was formulated during the 1930’s because there was an

economic downturn that could not be explained by the classical model. When resources

are not fully utilized the classical model fails. The biggest assumption with the

Keynesian model is that prices are “sticky.” Sticky prices are when there are contracts

with businesses that prevent prices from going down or up. Also, in the Keynesian

model the short run aggregate supply line is horizontal because full employment is not

as important with this model.


This graph shows that aggregate demand will not affect the price level because

the short run aggregate supply is horizontal. The major thing that the shifts in the

aggregate demand affect are the real gross domestic product of the economy.

The biggest thing that I like about the Keynesian model is that it takes into

account involuntary unemployment. Through this model we can see that when you

move down the short run aggregate supply curve the population starts to go down. This

shows that the population’s employment goes down. The issue with this is that prices

aren’t always sticky and being definite is important in a model but not as practical in real

life, in my opinion. More modern theories of the Keynesian model show that the short

run aggregate supply curve is slightly sloping upward. Having the curve slope upward

takes into account the fact that prices aren’t always sticky. One of the main things that it

shows is that the employers can work their employees harder and work them more

hours than normal. The same can be said with the equipment that is used by the

company. You can run the equipment longer and faster throughout the process.

Overall the model that I like the most is and would suggest is the classical model.

I believe that pure competition exists for the most part because I really like capitalism.
Competition returns everything to how it should be because prices will adjust with the

supply and demand. I do think that prices are flexible and will adjust to the conditions of

the market. For this main reason I would suggest that the classical model is best

although I know that it has its limitations. I have seen where prices can be a little sticky

but for the most part I believe that prices can adjust for the market. Overall I would

suggest that you go with the classical model, although it does have its limits.

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