Keynesian Theory Of Income And Employment, Role Of Effective Demand And Determination Of Aggregate Supply Price And Aggregate Demand Price (ADP & ASP)

WELCOME TO YOU

I heartily  welcome you all to read  about the "Keynesian theory of employment and output" which is proposed by J.M Keynes, His opinion on unemployment, criticism of classical employment, introduction of new terms by Keynes, etc.

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Introduction and history

The theory of employment by Keynes is a criticism on classical economists theory of employment. The Classical economists developed their theory with assumption with full employment equilibrium without inflation in the long run. They assumed full employment as a normal situation and unemployment is a temporary situation. 

Grate depression in 1930s

during the period of 1930s, World faced great economic depression and unemployment became a normal situation and full employment

equilibrium was not restored automatically as assumed by the Classical economists. In that situation there is no flow of income among the country people. even developed economies suffered due to depression.

Keynesian theory

In that situation of grate economic depression, John Maynard Keynes (J.M. Keynes) criticised the classical theory of employment and introduced his own theory of employment in his book "General theory of employment, interest and money" which was published in the year 1936. 

According to J.M. Keynes: the economy is in equilibrium at under employment in the short run. Keynes given more importance to short run view in the place of classical long run view, because in the long run we are all died. Keynes said that, under employment unemployment is the general phenomenon and full employment is a rare phenomenon. 

Terms

Keynes introduced many terms in his book "general theory of employment, money and interest" such as multiplier, propensity to consume, liquidity preference, marginal efficiency of capital (MEC), etc. Keynesian Theory of income and employment can be understood by studying 3 terms namely:

• Aggregate demand (Total demand) 
• Aggregate supply (Total supply)
• Effective demand (Total supply = total demand) TS = TD.

Aggregate supply price (Total supply price)

Aggregate supply price is the amount received by the all enterprises for selling their output at a particular level of employment. aggregate supply price rises with the increase in the level of employment and declines or diminishes with the decrease in the level of employment. The aggregate supply price schedule or function shows the various aggregate supply prices at different levels of employment. The ASP is depends on level of employment. 

S = f(N)

Where

S = aggregate supply

f = functional relationship 

N = level of employment 

Aggregate demand price ADP

It is the expected amount by the enterprise. The aggregate demand price is the amount which is expected to be received by selling their output produced by employing a particular level of men. or, it is the expected revenue to be received by selling their output at a particular level of employment. The aggregate demand price or aggregate demand function or schedule shows the various aggregate demand prices at different levels of employment. ADP rises with the increase in employment and declines with the decrease in the level of employment.

D = f(N)

Where

d = aggregate demand

f = functional relationship and

N = level of employment.

Effective demand (TS=TD)

It is the main concept in Keynesian theory of employment. Effective demand refers to the total demand for all goods and services in an economy at a level of employment. The point where aggregate demand price is equal to aggregate supply price is called as effective demand. according to this, the level of employment is based on effective demand which is based on ADP and ASP.

According to Keynes the main cause of unemployment is deficiency or decrease in effective demand. Employment can be increased by increasing the level of effective demand. Effective demand is the main concept of Keynesian theory of employment.

Determination of effective demand and employment

Determination of Effective Demand and Full Employment with diagram is provided in graphs page.

Criticism of Keynesian theory

Following are the points  of criticism to Keynesian theory:

• It is too aggregative without breakdown of concepts in detail.
• The assumptions are not real in developing and under developed countries.
• It is applicable for only developed and advanced capitalistic countries.
• The model gives misleading information because it doesn't consider the problem of income and distribution.
• in the theory the consumption levels of all groups / sections are considered together.