Question

what are the major factors that determine the output and employment level in classical model? and What role does aggregate demand has in determining output and employment?

kindly elaborate answer properly as I am studying classical model for the first time and don't know much about it.

Answer 1

Answer: The major factors that determine the output and employment level in the classical model are -  

1. Labour
2. Capital
3. State of technology
4. Income-Leisure tradeoffs
5. Population.

These are also factors that determine the aggregate supply level in the economy. First two, labour and capital, also called 'factor supplies" are referred to as the major factor of production. As being one of the assumptions of the classical model as "economy is at full employment level" implies that all resources are utilised at an optimum level. So for an increase in the output, it's the state of technology in the economy which determines the level of output. With advances in the state of technology yields higher output at any given level of labour-capital ratio.

Income-leisure tradeoffs affect effective labour in the economy. Suppose that if people prefer leisure over labour (work) for a given level of income then at that point there will be less labour supply in the economy. Population size also matters in the economy which is the ultimate source of labour supply in the economy.

The aggregate demand is not a determinant of output and employment in the classical model.

References: http://www.economicsdiscussion.net/employment-theories/classical-theory-of-employment-and-output-with-diagram/6205 (have a look for better understanding)