Assumptions Of The Classical Theory

Income Output and Employment: A Classical Theory

Assumptions of the Classical Theory

1. Full Employment

The classical theory assumes that the economy is always at full employment. This means that all resources, including labor, are fully utilized.

2. Wage Flexibility

The classical theory assumes that wages are flexible and can adjust quickly to changes in supply and demand. This means that if there is a surplus of labor, wages will fall until the excess supply is absorbed.

3. Profit Maximization

The classical theory assumes that businesses are profit maximizers. This means that they will produce the level of output that maximizes their profits.

4. Say's Law

Say's Law states that supply creates its own demand. This means that the total output produced in an economy will always be equal to the total demand for that output.

Conclusion

The classical theory of income output and employment is based on a number of assumptions that are not always realistic. In practice, economies often experience periods of unemployment and wage rigidity. However, the classical theory provides a useful framework for understanding the basic mechanisms of the economy.