Classical Economics

1. What It Is

The marginalist school that dominated bourgeois economics before Keynes.

2. Basic View

Under the premise of perfect competition, Say’s Law is used to argue that whenever there is a quantity of supply, a corresponding quantity of demand will be generated.

3. Discussion

3.1. Production Function

Where there is supply, there is demand, so the key focus is supply.

Output = y(employment, K), meaning that total output depends on total employment.

3.2. Labor Market

Total employment depends on the supply of and demand for labor, described by the labor-supply function and labor-demand function.

Labor-supply function: total labor supply = N1(real wage).

Labor-demand function: total labor demand = N2(real wage).

When the two functions are equal, the labor market is in equilibrium.

3.3. Money Market

quantity of money in circulation * average velocity of money = price level * real national income, meaning that the price level depends on the quantity of money. The price level here can refer to commodity prices or wages.

3.4. Product Market

Because saving exists, total demand < total supply. This problem can be adjusted through the interest rate, that is, by making saving = investment so that supply = demand.

Saving function: saving = s * interest rate.

Investment function: investment = i * interest rate.

Saving-investment equilibrium: s = i.

4. AS-AD Curve

Aggregate supply = aggregate demand.