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.
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