INSTITUTE –University School of

Business
DEPARTMENT -Management
M.B.A
Managerial Economics (22BAT-606)
Faculty Name : Dr. Akriti Gupta(Assistant Professor)

Lecture 3.2.1 DISCOVER . LEARN . EMPOWER

Classical theory of
Employment
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 • Space for
visual (size
24)
Classical theory
of employment
Course Outcome
CO Title Level Will be covered in this
Number lecture
CO3 To understand the types of markets and Understan
equilibrium of firm. d

CO4 To assess the National Income and the Assess

impact on the economy

CO5 Understand classical theory of understan 2

employment and Keynes objection to the d
classical theory, demonstrate the principle
of effective demand and income
determination.
 Classical theory
• 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.
• Theory of Classical economics can trace its roots to Adam Smith in 1776. In The Wealth of
Nations Adam Smith presented a comprehensive analysis of economic phenomena based on
the notions of free markets and actions guided by individual self interests in a laissez
faire environment.

Source : www.slideshare.net
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Assumptions:
Source : www.slideshare.net

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Say’s law of Market

• According to Says Law, when an economy produces a certain level of real GDP, it also
generates the income needed to purchase that level of real GDP. In other words, the economy
is always capable of demanding all of the output that its workers and firms choose to
produce. Hence, the economy is always capable of achieving the natural level of real GDP.
• 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

Source : www.economicsdiscussion.com
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Source : www.economicsdiscussion.com 6
Source : www.marketbusinessnews.com 7
Say’s law in Barter Economy

• Say’s law hold true for most of the cases in a barter system. In a traditional barter system,
goods and commodities are consumed either for consumption or for exchange with some
other goods. Supply of a commodity is possible only if there is a demand for it. For instance, a
person producing goods in excess should find another person in the market who is searching
for that good. This applies to all the other producers and consumers in the economy. So, in a
barter economy, products are exchanged for products, and supply creates in own demand.
• Moreover, people in a barter economy are self-employed which means that involuntary
unemployment doesn’t exist. Production is carried out in small scale and any earnings made
from the sale of the produced goods are invested in the business itself.

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Say’s Law in Money Economy

• Say’s law remains valid even in the money economy because classical economists view money
only as a medium of exchange with no active role in influencing the real sector of the
economy.
• In a money economy, the purchase and sale of goods and services is made possible by money.
People use money only as an easy and reliable source of exchange. The earnings made after
selling a product are used for the purchase of other necessary goods rather than for hoarding
or saving. However, not all money earned is spent as soon as it is earned. It is only a medium
that bridges the gap between receipts and payments.
• Further, classical economists did not consider saving as bad thing. Rather, they saw it as a way
through which investment could be increased in the economy. They believed that the
disequilibrium between saving and investment will lead to a decline in the interest rates. This
will discourage saving and encourage investment. The interest rates would continue to fall till
the level where equilibrium is gained and there are no un-invested savings among
households.

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 Summary

• Classical economists believed that full employment prevailed in the economy through wage
and price adjustments, and any deviation from the phenomena was considered to be an
abnormal event. In order to understand the classical view of employment, Say’s law of market
should be analysed.
• Say’s law of market, named after the proprietor Jean Baptiste Say, is a classical economic idea
which states that supply creates its own demand. The law views that aggregate output
produced generates aggregate demand at the same level, and argues that prices and wages
are flexible and maintain an equilibrium state in a self-regulating economy.

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References

• Textbook/ References
• T1: DN DWIVEDI, Micro Economics: Theory and Applications,Third Edition Vikas Publications
• T2: Paul G.Keat, Philip K.Y. Young, Stephen E.Erfle, Managerial Economics, 7 thEdition
• T3; H.L Ahuja, Macro Economics Theory and Policies, S.Chand, 20 th Edition.
• R1: Suma Damodaran, Managerial Economics, 2nd Edition, Oxford University Presss.
• R2 Christopher R. Thomas, S. Charles, Managerial Economics, Mc. Graw Hill.

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• Web Link
https://www.cliffsnotes.com/study-guides/economics/classical-and-keynesian-theories-output-
employment/the-classical-theory

• Video Link

https://www.youtube.com/watch?v=tZvjh1dxz08

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 Blackboard
Assessment Pattern

Components HT-1 HT-2 Assignment Surprise Test Business Quiz GD Forum Attendance Scaled
Marks

Max. Marks 10 10 6 4 4 4 2 40

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THANK YOU