Page 53 - DECO402_Macro Economics

Macroeconomic Theory

Notes Assumptions
The classical principle of employment and production is dependent on following assumptions:
1. Full employment is foundwithout inflation.
2. A close laissez faire capital economy is found without foreign business.
3. Full competition is found in labour and things markets.
4. Total production of economy is divided in the expenditure of investment and
consumption.
5. The quantity of currency is given.
6. Wages and prices are flexible.
7. Currency wages and actual wages have proportional relation.
8. Capital stock and technology knowledge are given.

Notes Classical principle believes that the full employment is found without inflation
in capital economics.

Say’s Law of Market

Say’s law of market is the element of the classical principle of employment. In the starting of 19th
century this establishment is presented by French writers Jean Bapiste Say “Supply created its own
demand”. It’s called the rule of Say. In the words of Say’s, “Production created market for things.
As anything produced then it creates market for other things which is similar its price. The Supply
of other item is according to the demand of the item and not more than that. “ This rule is applied on
the barter economy, where finally things is sale in place of things. Any things of market are demand
for any other things. According to Say’s, doing work is not interesting, so if any person is not want
to exchange his favourite thing with any things then he did not do work for the production of that
things. So the demand is involved in the work of supply of things. In that situation, more production
cannot possible because the supply of things will not more total demand. It may be possible that
one special thing is more produced, because customers wrongly assess the quantity of those things,
which is necessary for other. However, this situation is temporary, because that special thing is more
produce to reduce the production of others. So supply is creates its own demand so unemployment
cannot possible.
This basic rule cannot change to get the currency. As Prot. Hansen says that, “The market rule of Say
is the description of things- exchange economics. This rule is true by that view point that the main
source of demand is that flow of source-income, which creates by the process of own production."
When producer make available different inputs (land, Labourer and capital) are used in production
process, then they create the necessary income which got to sources owner as interest, wages and
tax. Above it creates demand for produced things. So supply creates its own demand. This logic is
based on that perception that all income of earned by source- owner is expand to buy that things they
helped in that production. Which part of income is not spent, it save and it invested. So saving will be
equal to the investment. If both have any difference, then by the median of rate of interest, similarity
is established. Interest is the reward of saving according to classical economist. The rate of interest
will more according to savings. Apposite it the rate of interest will as low, the demand of situation

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