Classical Theory

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Business operation differs between the two economic structures, classical and Keynesian. The second is a patriarchal finance scheme in which businesses pay employees for their jobs and employers make money from it (Dosi, Giovanni, and Roventini 35). Individuals are forced to invest what they have earned as a result of such an economy. The classical model, in contrast to this one, takes the form of output freedom (Fontana and Setterfield 48). External powers, such as the army, are inappropriate. The market powers are determined by individuals. Demand and supply are determined by the amount of productivity by entities. The Classical theory provides for a free market where individual decisions determine the request and requiring options (Galí 56). Government intervention is absent. It is an open will mode of exchange in which external interference is out of place. This model emphasizes the value theory which vests individuals with total control on the decisions made in the market. Consumers’ spending and decisions always create a backbone for such a market. This approach offers long term solutions in case of market abnormities such as inflation and scarcity. It is so because customers are empowered to merchandise more and make independent conclusions for a more secure future.

Keynesian Theory

On the other hand, the Keynesian economic theory advocates for public and individual choices in the marketplace (Galí 36). The latter takes the form of how much is spent and needed altogether. Government intervention is conspicuous in such a market. A public decision in this case entails government agencies while individual choices involve private entities and individuals in the market (Dosi et al. 23). This type of theory only serves to satisfy the most immediate needs in the market, hence the massive spending by government agencies.

Impact of the Models on Supply and Demand Curve

Since the Classical model provides for free choice in the market, a drop in support and run will steadily adjust hence adapting to the market prices comparatively (Galí 56).The quest and demand curve in such a market will be a straight vertical line because the inquiry, requisition, and price are quickly regulating at the same rate. From the perspective of the Keynesian model, the requirement and call curve is horizontal due to non-uniformity between the need and price. It is so due to lack of quality competition for fear of monopoly by larger business entities. Excessive saving and investments lead to lack of uniformity in market forces which makes the graph to appear such.

Influence on Inflation and Unemployment

Since the Keynesian model is based on slogan, it solves the problem of unemployment by enhancing more acquisition through improvements in infrastructure. It is done by the government to boost market mobility which in turns creates job opportunities. In turn, it raises the tax base for the state which theoretically lowers the rate of inflation (Dosi et al. 26). The Classical economic model, on the other hand, overemphasizes the monetary value and own produce. They do away with the zero roles of the government which has the most significant advantage to provide business infrastructure. Money and production held by the individuals and private entities in this model may be hoarded to create a shortage. Eventually, it reduces supply and increases capital in circulation which will lead to inflation. Unemployment is not spared either as the people will lack avenues to dispose of their products for fear of selling them at a throw-away price.

Works Cited

Dosi, Giovanni, and Andrea Roventini. "Agent-Based Macroeconomics and Classical Political Economy: Some Italian Roots." Italian Economic Journal, vol. 27, no. 1, 7 Jul. 2016, pp. 63-90, https://doi.org/10.1007/s00191-016-0466-4. Accessed Jan. 2017.

Fontana, Giuseppe, and Mark Setterfield. Macroeconomic Theory and Macroeconomic Pedagogy. Springer, 2016.

Galí, Jordi. Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework and its Applications. Princeton University Press, 2015.

November 23, 2022
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Economics Science

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