April 08, 2004
The Classical Model of Production and Employment
Flush with their successes explaining things with supply and demand, the classical economists attempted to explain business cycles with a model based on the supply and demand for labor. The central concept in this model is a production function that determines the quantity of output in terms of capital and labor. The amount of capital is taken as fixed in the short run.
At this point, we can determine the level of output.
Any unemployment that is observed should disappear quickly as the real wage rate adjusts.
Two additional diagrams account for the nominal price level and the nominal interest rate.
The left-hand diagrams above show a business cycle caused by a bad year for the production function.
Posted by bparke at April 8, 2004 11:23 AM