KEYNESS THEORY OF EMPLOYMENT:

PRINCIPLE OF EFFECTIVE DENAND The level of employment depends upon the level of aggregate effective demand, the greater the level of effective demand, the greater the amount of employment in an economy.

Aggregate Supply
At any given level of employment of Labour, aggregate supply price is the total amount of money which all the entrepreneurs in the in the economy taken together must expect to receive from the sale of the output produce by the given number of Labourers employed. In other words, the aggregate supply price is the total cost of production incurred by employing a certain given number of Labourers.

The aggregate supply is determined by the physical and technical conditions prevailing in the economy, that is, the nature and quantity of labour, capital and raw materials available in the economy. As these changes or as production technology is improved. As curve will also changed.

Aggregate Demand
It is aggregate demand which plays a more important role in the determination of employment. Aggregate demand has the following four components:

1) 2) 3) 4)

Consumer demand Investment demand Government expenditure, and Net Exports (that is, exports-imports)

In this introduction to the theory of employment, we will confine ourselves to the consumption demand and investment demand.

Determination of the Equilibrium level of Employment by Effective Demand

These aggregate demand and the aggregate supply curves determine the level of employment in the economy. Therefore, so long as aggregate demand price exceeds aggregate supply price, the entrepreneur will go on employing the extra men. Equilibrium level of employment is determined by the intersection of aggregate demand curve and the aggregate supply curve.

Under-employment Equilibrium
It is not necessary that the equilibrium levels of employment is always at full employment. The economy can be in equilibrium at less than full employment. The classical economists denied that there could be an equilibrium at less than full employment.

Under-employment Equilibrium
According to Keynes, aggregate demand and aggregate supply will be equal at full employment only if investment demand is sufficient to cover the gap between the aggregate supply price corresponding to full employment level and the consumption expenditure out of income at the full employment level.

The households, firms and the government incur expenditure as and when they demand goods and services. The expenditure incurred on consumergoods is called consumption-expenditure. Expenditure on Capital-goods is called investmentexpenditure. The Aggregate Demand rises with an increase in consumption on investment expenditure. Thus, the aggregate expenditure can also be considered as income receipts by the firms, since all spending are received by those who supply goods and services i.e. firms.

When the firms expect the earn more through increased expenditure of the community, on the goods and services, they will employ more works. Thus the Aggregate-Demand function represents a schedule of money receipts expected from the sale of goods and services produced corresponding to different levels of employment. The total sale proceeds increase with increase in the level of employment and viceversa.

The slope of the Aggregate-Demand curve diminishes, because people to spend a smaller proportion of their income, as their income rises in response to increase in output and employment. The A.D. curve rises at a diminishing rate.

Aggregate supply curve.

The minimum sale proceeds required to induce firms to produce an output and to provide employment on a given scale is called the Aggregate-supply price of that output.

It increase with increase in the level of employment and viceversa. The A.S. Curve showing the cost of producing various levels of output at different levels of employment.

Equilibrium Determination.

The equilibrium of National-income takes place at point E Production will not take place after point E Workers will remain unemployed between the area N.K.

The concept of Under Employment Equilibrium

In the diagram, point E, shown an equilibrium which is not showing full-employment in the economy. The A.D. curve has to move to a higher-level i.e. at point T, the equilibrium at point T, shous fullemployment. Alternative-approach.

SUMMARY OF KEYNES THEORY EMPLOYMENT

After explaining Keyness of employment at some length, we are now in a position to describe it in a summary from bring out relationship between various elements or factors that go to determine the equilibrium level of employment.

1. Level of output or income of a country depends on the level of employment. 2. The level of employment depends on the magnitude of effective demand which is the sum of consumption demand and investment demand at the point where aggregate supply curve intersects the aggregate demand curve. 3. Aggregate supply of an economy depends on physical and technical conditions of production. 4. Aggregate demand in a simple Keynesian model consists of consumption demand and investment demand. 5. Consumption demand depends on propensity to consume on the one hand and disposable income on the other. 6. Investment demand depends on the rate of interest and marginal efficiency of capital.

COMPARISON OF CLASSICAL AND KEYNESIAN THEORY OF EMPLOYMENT

1. First, classical theory of employment provides us with an analysis that would work only in the long run. Keynes doubted the usefulness of such a type of analysis and hence provides us with a system that works in the short run. 2. The classical system treats its variables demand and supply as flow variables. Keynes, on the other hand would treat the level of national output (aggregate supply) as given and leave the aggregate demand to bring about equilibrium in the economy. Supply is a stock variable at the point time in the keynesian system.

3. The classical system would lay more emphasis on supply as determination of the equilibrium level of income and employment in the economy. Keynes, on the other hand, assumes aggregate supply as given and leaves it to the forces to aggregate demand to determine the level of income and employment. 4. Both the theories that treat saving and investment differently. Whereas, in the classical theory, saving and investment tend to be equal. According to Keynes, saving and investment functions are performed by different groups of persons no reason why saving and investment should always be equal.

An economy can also be in equilibrium at the level less than that of full employment. As per Keynes but classical theorist assume equilibrium and at full employment level.