Classical Theory Of Income And Employment

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What is income and employment? Income and employment theory, a concept of economic analysis concerned with the relative levels of output, employment, and prices in an economy. It is the basic concept through which governments get help to make policies of any countries. Two important theories of income and employment 1. Classical Theory of Income and Employment 2. Keynesian Theory of Income and Employment 1. Classical Theory of Income and Employment: The theory is ascribed to early Classical economists like Adam Smith, Ricardo, and Malthus and neo-classical like Marshall, Pigou and Robbins. They believe that: An economy, as a whole, always functions at the level of full employment: That is, full employment of labor and other resources .when…show more content…
Classical behave that aggregate supply would always be at full employment level which is based on two assumptions, namely Say’s Law of Market and Wage-price flexibility as explained below. a) Supply creates its own demand: Classical theory of employment is based on ‘Say’s Law of market’ which states that ‘supply creates its own demand’. This implies that supply creates a competitive demand for it with the result that the whole of output is sold out. So, there is no deficiency in aggregate demand and hence no possibility of over-production and unemployment. Thus, equilibrium level of income and employment is established only at the level of full…show more content…
" (2) The Market Law says: According to Say's Law 'Supply creates its own demand', it is fundamental to the classical view of the economy. According to the French classical economist, J. B. Say, the production of goods and services generates sufficient expenses to guarantee that they are sold in the market. There is no deficiency in the demand for goods and, therefore, it is not necessary for workers to be unemployed. According to him, full employment is a normal condition of the market economy. J. M. Keynes has vigorously refuted Say's Market Law with the help of effective demand. The effective demand is the level of aggregate demand that is equal to the aggregate supply. When there is a deficiency in aggregate demand (C + I), a part of the goods produced remains unsold in the market, which leads to an excessive general production of goods and services in the market. When all the goods produced in the market are not sold, the companies dismiss workers. Deficiency in the demand for goods creates unemployment in the

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