Macroeconomics: Theory and Policy

4

The Classical Model of Income Determination

After studying this topic, you should be able to understand

• Say’s law states that ‘supply creates its own demand’.
• The aggregate of the demand in all the markets will always be equal to the aggregate of the supply.
• The production function describes the relationship between the inputs and the output.
• The marginal product schedule is the firm’s demand curve for labour.
• The classical theory had propagated a free market economy, which classical economists believed would automatically lead to full employment.

INTRODUCTION

In his book General Theory of Employment, Interest and Money, Keynes had pointed out that the term ‘the classical economists’ was invented by Marx to represent the followers of Ricardo ...