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September 05, 2006
A View of Failure to Sell Output
Keynes challenged Say's Law, which states that production creates its own demand. How could we depict a failure to sell the equilibrium output in a classical model?
If A cannot be attained because demand for output is insufficient, then we may be producing at point B. The demand for labor will be a vertical line to the left of A. An interesting question is whether the real wage will decline so that labor hired is still on the labor supply curve. An alternative is that the real wage rate does not change and the labor hired is less than the labor supplied. In that case, we have unemployment.
Posted by bparke at September 5, 2006 04:07 AM