O – ECONOMICS PRESENTA

SUBMITTED TO:- Mrs . Veena Grover

 CLASSICAL THEORY
The classical theory assumes over the long period the existence of full employment
without inflation.
Given wage-price flexibility, there are automatic competitive forces in the economic
system that tend to maintain full employment, and make the economy produce output
at that level in the long run. Thus, full employment is regarded as a normal situation and
any deviation from this level is something abnormal since competition automatically
pushes the economy toward full employment.
The classical theory of income, output and employment is based on the following
assumptions:
1. There is a normal situation of full employment without inflation.
2. There is a laissez faire capitalist economy without foreign trade.
3. There is perfect competition in labour, money and product markets.
4. Labour is homogeneous.
5. Total output of the economy is divided between consumption and investment
expenditures.
6. The quantity of money is given. Money is only a medium of exchange.
7. Wages and prices are flexible.
8. Money wages and real wages are directly related and this relationship is proportional.
9. Capital stock and technological knowledge are given in the short run.
 KEYNESIAN THEORY
According to classicists, there will always be full employment in a free enterprise
capitalist economy because of the operation of Say’s Law and wage-price flexibility. This
classical theory came under severe attack during the Great Depression years of 1930s at
the hands of J. M. Keynes.
He rejected the notion of full employment and instead suggested full employment as a
special case and not a general case. Full employment is a temporary phenomenon, an
astrological coincidence! He claimed his theory to be ‘general’, i.e., applicable at any
point of time. That is why he christened his epoch-making book: The General Theory of
Employment, Interest and Money (1936). Thus, Keynes’ theory is “general”.
i. Aggregate Supply (AS):
Employers hire and purchase various inputs and raw materials to produce goods. Thus,
production involves cost. If sales revenue from the sale of output produced exceed cost
of production at a given level of employment and output, the entrepreneur would be
induced to employ more labour and other inputs to produce more.
ii. Aggregate Demand (AD):
Aggregate demand or aggregate demand price is the amount of money or price which all
entrepreneurs expect to receive from the sale of output produced by a given number of
men employed. Or it refers to the expected revenue from the sale of output at a
particular level of employment.
THANK YOU