Keynesian Economics Vs Classical Economics

Answer: In economics there are two main theories, Classical economics and Keynesian economics. In our essay we will compare between this two theories.

Aggregate Supply: It represents the supply of goods and services in market. By using our resources, technology, and efficiency of our economic institution we can derive the aggregate supply curve.

Classical Economics: Before deriving the classical aggregate supply curve, we need to know about two additional concepts which are, the production function and the labor market. Production function is a function of capital and employment and where economy's capital stock is constant. And labor market is a place where workers find work, employers find workers who are willing to work and a place where wage rate is determined.

In classical economics an assumption made by classical economists is that, nominal wages and prices are fully flexible. Which means, if inflation rises nominal wages will also rise by same amount and the real wage ratio will be unchanged. This assumption also applies when there is a decrease in inflation. Nominal wage will decrease leaving the real wage ratio unchanged.

Economists said that, in classical economics, economy automatically and quickly adjusts recession. Prices and wages falls during recession which affects profits positively. Because more people are hired to work which increases production and economy bounces back of recession.

Assumption made by economists is that, in Classical economics AS is vertical and always at the full employment level.

This crucially important assumption will derive the slope of the classical AS curve and will be fundamentally responsible for the implications of fiscal and monetary policy in the classical world.

Keynesian Eco...

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...h. According to the Classicists, attempting discretionary demand-side stabilization by changing G, M, or tax rates would only change the rate of inflation. There is no role for fiscal and monetary stabilization in an economy by a vertical AS curve.

Keynesian Economics: From the discussions above we already know that Keynesian economy more concerned with GDP growth and unemployment. The ability of workers and their contribution to the economy matters more than the costs of goods. In Keynesian model fiscal and monetary stabilization are effective.

From the discussions above, we can certainly say that, in Classical Economics, Classicalist are tend to more focused on long term results where Keynesians care more to short term problems, which they think need immediate attention because they believe short term problems are the best ways to influence the long term results.