Page 60 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 3: Theories of Income, Output and Employment: Classical Theory

Figure 3.25 Notes
Y
Output S L

TP 2
Y
f 2
TP 1
Y
f 1

X
O L labour
f
2. Product Market: Increase in MP raises total product of labour (TP ) at all levels of
L L
employment. The full employment level of output also rises. The behaviour of aggregate
demand remaining unchanged, the overall price level falls. AD must also rise to reach
new equilibrium. Refer to the Figure 3.25. The TP curve shifts upwards. This raises the full
employment level of output. Now refer to the Figure 3.26. The AS curve shifts rightwards.
AD curve remaining the same, the price level falls to reach new equilibrium.
Figure 3.26

Y
Price
level AS AS 2
1

P
1
P 2

AD

X
O Y Y output
f 1 f 2

Figure 3.27
Y
Real S 1 S 2
R/I

r E
2 2
r E
1 1 I 2

I 1
X
O I 1 I 2 S, I

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