1. Classical Model of Employment
Prepared by:
Surbhi ; Rudrakshi ; Divyani ;
Harleen ; Pooja ; Shubhra.
B.Com (PC) Sem V

2. Introduction
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

3. Assumptions
Full
emmployment
Laissez
faire
Self
adjusting
Barter
system
Closed
economy

4. 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

5. Say’s law of market
Circular flow :

6. Wage price flexibility
Classical economist believed in full employment
situation
In case of unemployment, a general wage cut in
money wage to the full employment situation
 Demand of labour < supply of labour
 Demand falls » fall in demand of labour
 Fall in wage rate » rise in demand of labour
 Unemployment removed » full employment

7. Labour market equilibrium
Demand & supply of labour is function of wage rate
Demand for labour is decreasing function of wage
rate
Supply of labour is increasing function of wage rate

8. Full Employment
Full employment refers to that situation in which at a given
level of real wage demand of labour is equal to the available
supply of labour.
All those people get employment who are willing to work at
prevailing wage rate
Demand of labour = Supply of labour

9. Determination of employment and output
Factors of production:
P = f{land,labour,capital,technology}
In short run,supply of labour
increases therefore production will
increased
Law of diminishing return:
Output increases less propotionately
with employment

10. Determination of employment and output
Demand & Supply of labour:
 Demand increase with
decrease
In wage rate and vice versa
Supply increase with
decrease in
Wage rate and vice versa

11. Determination of employment
Demand of labour =
Supply of labour
 At real wage rate
labour and entrepenuer
are in equilibrium
 no. of labour willing to
supply their labour and
gets maximum
satisfaction

12. Explanation of Classical Theory
 Real wage = money wage
 DD < SS{unemployment}
 money wage decreases
 real wage decreases
 demand increases
 therefore DD = SS{full
employment}

13. Criticism
• Underemployment situation
• Refutation of say’s law
• Overproduction is possible
• Long run analysis unrealistic
• State intervention is essential
• Money is not neutral