1. Classical Theory
1.1 View
Classical economists are not well known for being, optimistic economists. Some of them think that the growth of the population would be too quick for the resources available. They thought that the government was not compelled to take part and attempt to fix this because, it would only escalate things and so in order to boost growth, free trade was to allow. The concept is known as Free Market approach. A lot of Adam Smith 's work was on this argument and also presented the notion of an invisible hand. For many he is seen as the father of modern ecominics.
1.2 Theories
Neo-Classical theories revolved principally on the act of markets in the economy. If markets were free and nothing blocked their quick sales then the economy will bloom. Every problem in the market should be handle by the government. The principal duty of the government is to make sure that free workings of markets applying supply side policies and to assure a balanced budget. The principal theories used to defend this view are: Theory of Money, Say 's Law Quantity, Free market theory Free market theory Neo-classical economist though that if the economy were left to itself, it would gravitate to full employment equilibrium. …show more content…
It could probably work if the labour market functions accurately. If by any chance was unemployment, this would happen:
Unemployment Increased Equilibrium (a surplus of ----------> Fall in ----> demand for -----> restored at full labour) wages labour employment
Labour market diagram The diagram above of the labour market shows that, the wages are starting large and no employment of AB. This will cause wage rate to drop and employment rise consequently from Q1 to Q2. All unemployment remaining in the economy will be voluntary unemployment. Say 's Law This law is named after an economist called Jean Baptiste Say. His law says that: ‘ 'Supply creates its own demand’’. This defends the neo-classical view that the economy would gravitate to full employment. …show more content…
Because, accordingly to this law, the minimum increase ‘’Supply’’ will lead to ‘’Demand’’. There will be always full employment and there won’t be any decrease of demand. If there were any unemployment it would be for a short time, as the pattern of demand changes. Although, the same process seen previously will restore equilibrium
Quantity Theory of Money
Neo-classical economists notion of inflation reflect on the Quantity
Theory of Money, which came from Fisher Equation of Exchange: MV = PT
They proposed that the velocity of totation of money would be relatively balance and the number of transactions being done would always gravitate to full employment.
1.3 Policies
Neo-classical economists believe that the economy is adjusting itself, because the economy gravitates to full-employment, there is no demand to interfere in the economy. The main points to long-term balance growth are: Supply side policy Money Supply policy
Supply-side policies
To decrease market imperfections supply-side policies can be used. Which could affect by increasing long-turn aggregate supply. If by any chance the degree of aggregate supply increases then according to Say 's Law the demand will subsequently increase. This will be the only non-inflationary way to get increases in output.
Supply-Side Policy Diagram Working with supply-side policies would raise the degree of output from qfe1 to qfe2, however price level would maintain balance. As mention above Supply-side policies reduce market imperfection, which are: • Developing education and training • Reducing the level of benefits •
1.1 View
Classical economists are not well known for being, optimistic economists. Some of them think that the growth of the population would be too quick for the resources available. They thought that the government was not compelled to take part and attempt to fix this because, it would only escalate things and so in order to boost growth, free trade was to allow. The concept is known as Free Market approach. A lot of Adam Smith 's work was on this argument and also presented the notion of an invisible hand. For many he is seen as the father of modern ecominics.
1.2 Theories
Neo-Classical theories revolved principally on the act of markets in the economy. If markets were free and nothing blocked their quick sales then the economy will bloom. Every problem in the market should be handle by the government. The principal duty of the government is to make sure that free workings of markets applying supply side policies and to assure a balanced budget. The principal theories used to defend this view are: Theory of Money, Say 's Law Quantity, Free market theory Free market theory Neo-classical economist though that if the economy were left to itself, it would gravitate to full employment equilibrium. …show more content…
It could probably work if the labour market functions accurately. If by any chance was unemployment, this would happen:
Unemployment Increased Equilibrium (a surplus of ----------> Fall in ----> demand for -----> restored at full labour) wages labour employment
Labour market diagram The diagram above of the labour market shows that, the wages are starting large and no employment of AB. This will cause wage rate to drop and employment rise consequently from Q1 to Q2. All unemployment remaining in the economy will be voluntary unemployment. Say 's Law This law is named after an economist called Jean Baptiste Say. His law says that: ‘ 'Supply creates its own demand’’. This defends the neo-classical view that the economy would gravitate to full employment. …show more content…
Because, accordingly to this law, the minimum increase ‘’Supply’’ will lead to ‘’Demand’’. There will be always full employment and there won’t be any decrease of demand. If there were any unemployment it would be for a short time, as the pattern of demand changes. Although, the same process seen previously will restore equilibrium
Quantity Theory of Money
Neo-classical economists notion of inflation reflect on the Quantity
Theory of Money, which came from Fisher Equation of Exchange: MV = PT
They proposed that the velocity of totation of money would be relatively balance and the number of transactions being done would always gravitate to full employment.
1.3 Policies
Neo-classical economists believe that the economy is adjusting itself, because the economy gravitates to full-employment, there is no demand to interfere in the economy. The main points to long-term balance growth are: Supply side policy Money Supply policy
Supply-side policies
To decrease market imperfections supply-side policies can be used. Which could affect by increasing long-turn aggregate supply. If by any chance the degree of aggregate supply increases then according to Say 's Law the demand will subsequently increase. This will be the only non-inflationary way to get increases in output.
Supply-Side Policy Diagram Working with supply-side policies would raise the degree of output from qfe1 to qfe2, however price level would maintain balance. As mention above Supply-side policies reduce market imperfection, which are: • Developing education and training • Reducing the level of benefits •