Topic
Income, Output and
Employment
Date:13/03/19
Lecture: 15th

Topic Layouts
 Introduction
 Theories of Income, output and employment
 Classical theory
Say’s law of market
Assumptions on say’s law of market
Equilibrium in the labor market
Classical analysis of price and inflation
Keynes Criticism on say’s law of market

Basic Terms
Employment
A situation when a person is able and
willing to take up a job and gets employed
Full Employment
A situation where all the workers who are
able and willing to work and get employed
Unemployment
A condition when a person is willing to
work but unable to get opportunity to
work.
Under Employment
When people are engaged in jobs but not
according to their qualifications, capabilities
and efficiency.
Full Employment Level
The level of employment where all the available
supply of labor is gainfully employed
Equilibrium level of Employment
The employment level where aggregate demand
of labor equal aggregate supply of labor

Introduction
An analysis concerned with the relative
levels of output, employment, and
prices in an economy.

Theories of Income, Output and Employment
Classical Theory of
Income and Employment Keynesian Theory of
Income and Employment

Classical Theory
Firstly used by Karl Marks to define the thoughts of:
 Adam Smith
 David Ricardo
 Jean-Baptiste Say (J-B Say)
 John Stuart Mill (J-S Mill) And others…
who believed on laissez faire policy (No Government Intervention)

Classical theory
 According to classical economists:
Full employment is normal feature of capitalist economy
Economy always be in full employment equilibrium
Wages and prices are flexible
Economies produce output at level of full employment

Assumption on classical theory
Say’s Law of
Market
1
Flexibility
of the
interest
rate
2
Flexibility
of the
wages
rates
3

Say’s Law of Market
 J.B Say (1776-1832) who Influenced by Adam smith and David Ricardo
Firm produces
goods
Pay to factors of
production
Household spend
whatever gets
from firms
Produced goods
create its own
According to Say’s law of
market:
“Supply creates its own demand”
Total production = total demand

Assumptions of the Say’s Law of Market
 Pure competition exist (no single buyer, seller or input affects price)
 Self interest (in both sides self interest is must)
 No government interference

Equilibrium in labor Market
 Arthur Cecil Pigou (Pigou’s wage-cut theory 1943)
 “If wages are flexible in labor market then level of full employment is
automatically achieved”.
 Equilibrium level of employment is determined by supply and demand of labor
 Demand for labor is inverse relation with wages
 Supply of labor is positive relation with wages

Equilibrium in labor Market
0
10
20
30
40
50
60
70
80
90
20 40 60 80
Equilibrium of labor market
Supply of labor Demand of labor

Keynes’ criticism on classical theory
 Saving depends upon national income and not affected by interest rates but
investments do. Says’ law no longer fix with it.
 Labor market is not perfect as mentioned in classical theory because:
The existence of trade unions
The government interventions for imposing wages law
Unions may raise wages even during no excess demand for labor
 If wages are flexible but would not be able to achieve automatic full employment:
In depression, monitory policy lose its effectiveness
Influence rate of interest, income, and investment

Theory of Effective Demand (Keynes’
general theory of Employment)
 John Maynard Keynes (J.M Keynes 1936)
Volume of employment depends upon level of effective demand
Unemployment is due to deficiency in demand
Theory denoted the total demand of goods and services by community
Flow of expenditures (expenses of oneself is income of others)
Consumption expenditures and investment = total demand of goods and
services

Post Keynesian theory
 The term "post-Keynesian" was first used by Eichner and Kregel in (1975)
 Theories of income distribution, growth, trade and development
 Money supply responds to the demand for bank credit
 Central Bank cannot control the quantity of money, but only manage the interest
rate by managing the quantity of monetary reserves.

Conclusion