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Trevitchick Old Classical, 1-3chapt


1.   alterations between desire to save and invest do not change output and employment, but change interest

2.   Real wage changes to produce full employment

3.   absolute price level depend on the quantity of money

Economy reaches to full employment (strong Say), supply creates its own demand (weak say). MPC=1 Aggregate expenditure is Y=E line. Savings and investment are equated by interest rate.

We assume that the real interst rate is the same as nominal(no inflation). This says that the lower the interest more money is demanded.

A decline in the desire to save should set up an alarm for regression for Keynes. For classical economists just the intrest will fall and less is investment





The treasury view

1920s mass Unempl. Treasury did not see that public work can be a cure.

The rise in interest line chockes off some private investment. Savings have risen, so some consumption is lost.

Classical economists Y=C+I+G


dG=-(dI+dC)- Crowding out is 100% consisting of both I and C. Government expenditure would distort  the distribution of factors, thus fiscal policy is useless.

No classical economists except Pigou have written about the Labour. Supply is normal or bacward bending. Demand is MPP. It comes out of shortrun production function. They assumed that reductions in money wage are the same as for real wage, becaus:

1.      The considered open economy with fixed exchange rate

2.      fallacy of composition (what holds true for individual does not for society)

3.      the quantity theory of money. Unemployment is caused because money wages can't adjust to outflows of gold.

This can only be true if wages don't determine price level or the economy is a barter one.

1.         Labour supplys, labour want to max utility

If wage rises:

If income effect is strong then Ls is backward sloping.

If consumers have a target wage (they don't want more), they want more leisure. So abstenternism rises.

In long run income effects are stronger, in short run substitution is stronger.

2.         Firm aim is to minimise costs at given level of output

Assume our that a single firm receives a prespecified order ie 200 cars. Q=200. In well behaving neoclassical model firm faces infinite possibility of prof.functs:


K= - *L


MPPk - hiring on more capital

MPPl -extra output produced taking one more labour

MPPk*dK+MPP*dL=dQ in isoquant=0

MPPk*dK+MPP*dL=dQ in isoquant=0


Cost minimising

Maximise U=U(x1,x2,...,xn)

subject to M=P*X1+P2X2 ..

For firm minimse C=wL+rK

subject to Q=Q0

K/L - cost minimising techique of production.

Cost minimising equilibrium MPPl/w=MPPk/r

Fixed coefficienct of production (isoquant has a kink) produce only at kink.

If no infinite sets of production exists:

3 efficient production paths T1 T2 T3, so if labour becomes much cheaper, firm alters production techniques.

Equilibrium in economics

In equilibrium Dt-St=0 for any t.

In this case Ls>Ld

The can be excess suply on the labour market. Classicalists - eq. is when all the markets clear.

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