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THEORY OF
EMPLOYMENT
I. INTRODUCTION
Book titled “ General theory of
Employment, Interest and Money”.
He believed Full employment was a rare
phenomenon / special case, unlike –
Classical economics.
Keynes believed in Less than full
employment
II. PRINCIPLE OF EFFECTIVE DEMAND
Volume of employment depends on level of effective
employment.
Therefore, unemployment = Less demand
Effective demand = Total demand of goods and services
Therefore, Income and Flow of expenditure are important
considerations.
Income Expenditure Demand
Higher income = high expenditure = Low investment
But expenditure and investment will have to be equal
If the above does not happen a gap / deficiency is formed.
A gap is formed between income and consumption which
will lead to unemployment.
Hence, it must be understood that Consumption and
Investment also have to be given equal importance.
Keynes failed to assume or consider Government
interventions.
He was more concerned with the entrepreneurs and
capitalistic environment.
But today business environment is “Mixed”.
Hence, Effective demand = C + I = G
C = Consumption expenditure of Household
I = Investment expenditure of Private firm
G = Government expenditure on Consumption and
Investment goods
III. LEVEL OF EFFECTIVE DEMAND
According to Keynes, Effective demand = Interaction between
Aggregate Supply function and Aggregate Demand function
Aggregate Supply Function ( ASF )
- It is the selling Price at which seller is willing to supply his
goods and services at the market.
Price increases as Quantity increases.
Whole Output = Response of all entrepreneurs = Level of
Labour
Level of Output = Level of Employment
- FOP / COP = Factor Of Production / Cost Of Production
Land, Labour, Machinery and Investment.
AGGREGATE SUPPLY FUNCTION / AGGREGATE
SUPPLY PRICE SCHEDULE
Minimum price of the revenue proceeds the entrepreneurs must get from the sale
of output, associated at different levels of employment.
50
40
30
INCOME
20
10
Q
O 1 2 3 4 5
1 175
2 250
3 325
4 400
5 475
6 550
Y
Rs.
ADF = F (N)
MINIMUM RECEIPTS / INCOME
550
ADF = f ( N )
475 ADF = expected sales
receipts
400 by entrepreneurs
325 N= volume of employme
F= functional relationshi
250
175
O 1 2 3 4 5
Y
ASF
RECEIPTS / INCOME
Z
ADF
a E
R
O N1 N NF
EMPLOYMENT ASF