Classical theory of employment

1. Classical Model of Employment Prepared by: Surbhi ; Rudrakshi ; Divyani ; Harleen ; Pooja ; Shubhra . B.Com (PC) Sem V

2. 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

3. Assumptions

4. 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

5. Say’s law of market Circular flow :

6. 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

7. 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

8. Full Employment Full employment refers to that situation in which at a given l evel of real wage demand of labour is equal to the available s upply of labour . All those people get employment who are willing to work at p revailing wage rate Demand of labour = Supply of labour

9. 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

10. Determination of employment and output Demand & Supply of labour : Demand increase with decrease In wage rate and vice versa Supply increase with decrease in Wage rate and vice versa

11. 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

12. Explanation of Classical Theory Real wage = money wage DD < SS{unemployment} money wage decreases real wage decreases demand increases therefore DD = SS{full employment}

13. Criticism