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• Full employment means that all labor and other productive resources are employed
• Full employment indicates that all persons able and willing to work at prevailing wage rates are employed
• This means there is an absence of involuntary unemployment in the economy
• Even with full employment, voluntary and frictional unemployment can still exist
• In countries where there is no unemployment problem, a certain amount of unemployment may still exist

Classical Theory of Employment

• Developed by classical economists following Ricardo, including J.S. Mill, Marshall, and Pigou
• According to the theory, there is typically full employment of labor and other productive resources in the economy
• Involuntary unemployment can't exist because there is always full employment of labor and other resources in the economy
• However, if involuntary unemployment exists, there is always a tendency towards full employment
• There are no government regulations or controls on economic activities
• Price mechanism operates in the economy, leading price levels, wage rates, and interest rates to be flexible
• Unemployment is removed quickly due to the working of price mechanism (interest & wage)
• There is perfect competition in factor and product markets
• There is optimum allocation of resources i.e. all resources are fully employed
• The market can expand and contract to fit circumstances
• The economy is always in equilibrium, meaning total demand equals total supply
• The market avoids general over or under-production
• Money isn't a key factor in determining output, income, and employment
• It is only be used as a medium of exchange

Say's Law of Market

• "Supply creates its own demand", meaning that whatever goods are supplied will automatically be demanded
• This can be explained using barter and money economies

Say's Law in Barter Economy

• Goods and services are exchanged for each other
• Production and supply of one set of commodities creates demand for another, and vice versa
• Aggregate supply is equal to aggregate demand, preventing general overproduction and involuntary unemployment
• Sometimes, there may be partial overproduction due to miscalculation of future demand, resulting in involuntary unemployment
• Price mechanism works to remove overproduction and unemployment in a short period, returning the economy to full employment

Say's Law in Money-Using Economy

• It means production creates a supply of goods
• Production requires factors like land, labor, capital, and entrepreneurship
• The owners of these factors receive money as rent, wages, interest, and profit, creating income
• This income creates demand for goods already supplied
• If people spend their entire income, demand equals supply
• If there is production, there is income, and therefore demand for goods

Say's Law and Classical Macroeconomics

• Forms the basis of classical macroeconomics, stating that supply creates its own demand so overall economic equilibrium is ensured
• Classical economists, like David Ricardo, used it to say that a capitalist economy is always in equilibrium under laissez-faire policies
• General underproduction or overproduction cannot exist because changes in prices automatically cause supply and demand to quickly adjust
• Short-term imbalances may happen, but market forces fix them
• Excess demand raises prices during underproduction, which reduces demand and increases supply
• Excess supply during overproduction reduces prices, discouraging production and increasing demand to restore equillibrium

Mathematical Proof of Classical Equilibrium

• The total value of production in the economy is always equal to the total production cost, including wages, rent, profit, and interest
• Factor incomes equal the total expenditure, which is then equal to the total value of production, ensuring equilibrium

Unemployment under the Classical System

• Classical economists thought general unemployment can't continue
• Full employment means output is sufficient
• If unemployment does arise, falling wage rates are key, making it more profitable for businesses to increase labor demand and eliminate unemployment

Types of Unemployment Under the Classical System

• Voluntary Unemployment results when workers are not working because they refuse to work at the prevailing wage rate

• It can resulte for reasons like strikes, wealth-induced inactivity (idle rich), or choosing leisure over work

• Frictional Unemployment is temporary unemployment due to imperfections and mobility problems in the labor market

• Its caused by things like technological changes, natural disasters, etc

• The classical theory still considers full employment normal

Classical Theory of Employment

• It's based on the ideas of economists like Adam Smith, David Ricardo, J.S. Mill, Alfred Marshall, and A.C. Pigou
• Full employment with economic freedom is key
• Any change is temporary
• It is said that "supply creates its own demand" which is the basis of Say's Law, ensuring no general overproduction

Main Assumptions

• There are 9 key assumptions
• The economy naturally operates at full employment
• There is non-intervention (Laissez-Faire System)
• This is a closed economy where there is no foreign trade
• Labor and production can work in perfect competition
• All workers have the same traits
• Changes to Wages and Prices can happen smoothly
• Money is primarily used for Transactions
• Savings and investment are automatically balanced
• Investment is key

Say's Law and Market Equilibrium

• Total demand will equal supply
• Excess goods cause prices to fall
• Shortages cause prices to rise

Mathematical Expression of Equilibrium

• Value of total production = Total Factor income = Total Expenditure
• Total Demand = Total supply

Production Function Diagram in the Classical Theory

• The X-axis signifies labor input while the Y-axis signifies total output
• A curve in the diagram is key in having a direct relationship between workers employed, total output produced, capital stock, and technological knowledge staying constant
• Total output will increase during higher total output
• NF is full employment, more will result with less worker productivity
• Full labor causes inefficiencies when the constant means there will be overcrowding and lesser output

Labor Market Equilibrium

• In the labor market, labor demand and labor supply determines output and employment levels

• Classical economists saw labor demand as a functino of the real wage rate

• Wage rate divided by price level derives (W/P)

• Demand declines while Dn curve increases

• Labor supply depends on the real wage rate Sn =f (W/P)

• Increasing wages is key

• When D and S curves meet the full employment level Nf is reached

• Rising wage rate from WPo to WP1 will cause a labor supply greater than its demand

• Now, the ds workers will involuntarily not be employed because there is less supply (W/P1-d)

• With the competition, they will do anything to lower it

Wage Price Flexibility

• Classical economists believed there was always full employment
• A money wage cut would help the economy in a case of unemployment
• It assumes there is a connection between money and real wages

Pigou proposition

• Pigou states that N = qY/W, where reduction in W, will increase N

• Prices fall, product demand increases and the sale goes up

• Employment becomes required to sustain this

• Demand declines and requires wage to equal MPN

• Real wages increases causes job rates to increase with W/P. the intersection between these two panels shows the point and unemployment disappears to allow full employment

Goods Market Equilibrium

• The market is great when supply matches demand
• It's said you will automatically invest as the Classicists do
• Equality is key through the rate of interest

Interest Rates

• They depend on supply and demand with S=f(r) and I = f(r)
• The rates help saving
• Investment helps at all times

Money Market Equilibrium

• It's said MV = PT, where M = supply of money, V= velocity of circulation of M, P = Price level, and T = volume of transaction or total output
• The equation is:
• changes to supply will change price
• the level of price is related

Output vs Price

• Real output prices vs money prices will always be a hyperbola
• Level OP means quantity
• Quantity creates a shift in time

Criticisms of classical theory

• Full power is key
• Market fails if deficiency occurs
• It has to occur through savings and investment done to separate all
• All motives are different and unequal
• Higher investment to interest is key

Flexibility

• Wages and prices won't move

• Keynes would say "no"

• Lower labor decreases demand

• The money can fluctuate

• Money helps a system

• Fiscal measures do exist

• Prices can fall with supply and income and maintain a rate

• The rise of supply will equal the rate of employment

The consumption function

• First explained by Keynes with several factors
• expenditure depends on income
• Past investment helps

Mathematical formula

• C= f(y) states what we do
• More money helps spending

Average relationship

• You measure these to following concepts
• APC
• MPC

Additional Income

• A ratio to the income
• consumption shows income
• It helps MPC and all attributes
• More income is key

Non-Linear relationship

• Income increases, expenditure goes up
• So MPC is all positive
• It depends on different curves too

Dimishing income relationships

• It is connected to consumption
• Each relationship is tied

Investment Multiplier

• Explain the investment
• Increase with time
• Figures show what can be caused
• Multiplier for the system

The process

• Multipliers cause a few things
• Additional money

Total is key

• Assumptions in play:
• Autonomous
• There are gaps to it
• Constant money does count
• Less employees show this system

Keynes Theory

• According to savings equal investment S = I, new data can be set:
• I=investment to get S- saving will lead to numbers It is dependent:
• numbers go up
• you can make charts and numbers

Multi factor equations

• The multiplier has different effect
• primary
• secondary
• All of it increases with investment
• A different economy helps

Diagram Equations

• Numbers affect diagrams
• Y axis is expenditure
• Data makes income look different

Limits

• Diversions can change data
• High power saves everything

Money impact system

• Old factors do not count
• Taxes will always lower and higher
• There is more or real aspects
• Market counts
• Investments rise

Economics

• A complex approach that needs to be studied for investment purposes
• It creates boom or recession
• It is key there

Equilibrium

• It helps govern the country with rising rates
• It has to have correct timing

Multiplier

• What does it all say
• It explains many factors with spending habits