Classical vs Keynesian

In: Business and Management

Submitted By DashboVON
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Classical Economics Assumptions:
There are three basic assumptions. They are:
Flexible Prices: The prices of everything, the commodities, labor (wages), land (rent), etc. must be both upwardly and downwardly mobile.
Say's Law: 'Supply creates its own demand'. The Say's law suggests that the aggregate production in an economy must generate an income enough to purchase all the economy's output. In other words, if a good is produced, it has to be bought.
Savings - Investment Equality: This assumption requires the household savings to equal the capital investment expenditures. Should the savings not equal the investment, the 'flexible' interest rates should be able to restore the equilibrium.

Basic Theory
Classical economic theory is rooted in the concept of a laissez-faire economic market. A laissez-faire--also known as free-- market requires little to no government intervention. It also allows individuals to act according to their own self-interest regarding economic decisions. This ensures economic resources are allocated according to the desires of individuals and businesses in the marketplace. Classical economics uses the value theory to determine prices in the economic market. An item’s value is determined based on production output, technology and wages paid to produce the item.
Classical economics focuses on creating long-term solutions for economic problems. The effects of inflation, government regulation and taxes can all play an important part in developing classical economic theories. Classical economists also take into account the effects of other current policies and how new economic theory will improve or distort the free market environment.

Keynesian Economics Assumptions
Rigid or Inflexible Prices: While a wage hike is easier to take, wage falls hit some resistance. Likewise, while for a producer, commodity prices are easily upwardly…...

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