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CLASSICAL MACROECONOMIC: OUTPUT AND UNEMPLOYMENT - Coggle Diagram
CLASSICAL MACROECONOMIC: OUTPUT AND UNEMPLOYMENT
Classical Economics & Keynesian Revolution
the forces that determine income, employment & prices had been receive greater attention
Urgency to study: business cycle & policy prescription for stabilizing economic activity
The Classical Revolution
Revolution against a body of economics doctrines known as mercantilism
Two tenets of mercantilism
the belief of wealth & power of a nation were determined by stock of precious metal
the belief in the need for state action to direct the development of the capitalist system
Features
classical economic stressed the role as opposed to monetary factor in determining output & employment
classical economics stressed the self adjusting tendencies of economy
Production
Based on the technology of individual firms, is relationship between the level of output and level of input
Production function: Y=(K,N)
Y:output
K:stock of capital
N:quantity og homogeneous labor input
IN SHORT RUN
the stock of capital assumed to be fixed
state technology & population assumed to be constant
output varies solely with variation in the labor input from fixed population
MPN=CHANGES OF Y/CHANGES OF N
EMPLOYMENT
the market work well
firms and individual workers optimize
they have perfect information about relevant prices
there no barriers to the adjustment of money wages
the purchasers of labor services are firms
LABOR SUPPLY
labor services are supplied by individuals workers
classical economists assumed that the individual attempts to maximize utility (satisfaction)
the aggregate labor supply curve:
Ns=g(W/P)