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Unit-5: Classical Theory of Employment

stock K, technical knowledge T and the number of labour N. This production function show that total Notes
production, capital stock and technical knowledge is increasing function of the number of labour. In
figure 5.3 total production OQ is analogy to full employment level Nf.

Classical economist believed that in the normal competitive situation, full employment will continue
without inflation. In spite of competition among the owners for putting labourers to work, wages will
not be more than full employment level. Now because of applying the Say’s rule, the full employment
of production will generate the demand on that level. The increment in the all demand is the reason
of inflation. But the mechanism of the rate of interest is stop to more increment in all demand. Again,
inflation is also because of that when the currency such increased that incrementing production cannot
supply it. But it is also not possible, because the increment in the quantity currency is only increase
absolute price level not relative. So full employment is get without inflation in classical system.

Did You Know? The nature of economic system within free competition is that full
employment automatically provide in labour market.

Self-Assessment
Fill in the blanks:
1. The market rule of Say is the heart of ………………………..employment.
2. According to Say, Supply creates its own ………………
3. The market law of Say, in the broad form free………..is the description of economics.

5.2 Summary of Complete Classical Model

The classical principle of employment is based on the assumption of full employment according to
it there are find the normal situation of full employment in economies and the abnormal situation
of unemployment is abnormal. In Classical principle the selection of production and employment
is in the market of labourur, things and currency of labourur of economics, it show in the 5.5 figure.
The power of supply and demand in this market will take the full employment. By any interference
of government of there will not full employment. His mean of full employment is that no where the
involuntary employment.
Production and all production function of employment in the Classical analysis are decided by the
demand of labourur and supply of labourur. Stock of capital, technical knowledge and on given the
other inputs there are a certain relation in the quantity of total production and employment it calls
Q=f (K, T, N) as show in the figure penal (B). In other words, total production is the function (f), capital
stock (K), technology(T) and labour number (N). When K and T is given then labourer number function
is Q=f(N). But when more labour goes after a limit then get the diminishing marginal returns.
The demand of labour and supply of labour in labour market distract the level of production and
employment in economics. The demand of labour is dependent on total production. More production
increased the demand of labour and the demand of labour dependent on its frontier physical
productivity (MPP) which reduced to apply more tax. The supply of labour is dependent on the
labour rate D =f (W/P) is the increment function of labour rate. Other side, the demand of labour is
l
dependent on labour rate S =f (W/P) and it is the diminishing function. So the demand and supply
l
of labour is because of the actual wages rate (W/P). The intersection point E of demand and supply
of labour decide the full employment on wages rate (W/P), D =S -N , as show in Panel (C).
l l f

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