Question

Classical economists believed that the economy will have full employment and any deviations from the full employment will be temporaryExplain in detall. Use theoretical reasoning and diagrammatic representation liberally to support your answers . ( 15 nts)

Answer 1

classical economist believed that full employment is a general feature of any economy.the economic forces and furthermore, the wage price flexibility maintain the equilibrium in the economy.if there is any deviation from the point of equilibrium then it would be restored to earlier level of equilibrium automatically.

we can understand this concept with the help of an example classified in step 1 and step 2

STEP-1

• suppose the demand of labor and supply of labor in an economy is at its equilibrium point.the industry is providing reasonable wage rate to its workers.now suppose many labors demand for higher wages from the firms now due to increased wage rate the cost of production would increase and thus the firm would demand less labors in the economy.there would be excess supply of labors in the labor market who are unemployed.

STEP-2-

• in this situation where supply of labor is more than demand of labor, ultimately, workers would have to reduce their wage rates to get work.when additional labor force is available at lower wage rates,the demand for labor would increase and there would be again equilibrium in the labor market.

we can same observes from the following diagram-

as we can see at wage rate W the economy is at equilibrium point but the wage rate was increase to W1 then the supply of labor was increased to QS but demand of labor was decreased to QD and therefore there was excess supply of labors and ultimately the economy was restored at earlier equilibrium point E.