Keynes theory of employment

Keynes criticised classical theory of employment and gave his on theory of employment.
According to him supply does not create its own demand. According to him amount of
employment is determined by aggregate demand and aggregate supply.

Aggregate supply function.

Aggregate supply function shows the relationship between the number of workers employed
and the receipts which all firms in the economy must get if it is just worth employing them
.In other words aggregate supply function shows the relationship between number of
workers employed and the aggregate supply price. aggregate supply price is the amount
which all the entrepreneurs expect to receive from the sale of the output.

Aggregate demand function.

According to keynes aggregate demand function plays an important role in the determination
of employment .Aggregate demand price shows the the total sum of money which all firms
India economy actually expect to receive from the sale of output produced by workers
employed in the economy. A ggregate demand depends upon Consumption demand

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investment demand .
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Determination of equilibrium level of employment.
Determination of equilibrium level of employment explained with the help of the
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following figure.
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In the given figure receipts are taken on y axis and Employment is taken on x -axis. Ad is
the aggregate demand curve and As is the aggregate supply curve. aggregate demand and
aggregate supply curve intersect at point E at which equilibrium level of employment is
determined we can see from the figure that when ON1 number of workers are employed
very demand is OH and aggregate supply is OC therefore producers will continue to employ
more workers because it is profitable for them.This process will continue till ON2 number of
workers are employed.At this point E what the entrepreneurs must receive is equal to to
what they a actually expect to receive. beyond point E aggregate supply curve is is higher
then regain demand curve and therefore it will not be profitable for the entrepreneurs to
employee more than ON2 number of workers. As can be seen from the figure employment
at point E when ON2 number of workers are employed ,there is less than full employment.
According to keynes equilibrium can establish at less than full employment. If the economy
has to reach the level of full employment then there is a need for increasing aggregate
demand by increasing investment demand or consumption demand. This will shift the
aggregate demand curve upward which will intersect the aggregate supply curve at point R
which will show the situation of full employment in the economy. This is shown in the figure
given below.

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In the figure it can be seen that equilibrium level of employment is determined at point E
which is known as the point of effective demand. Similarly full employment is determined at
point R. Thus points like E and R are known as points of effective demand.Thus according
to Keynes equilibrium level of employment is determined at the point of effective demand.
Importance of keynes theory of employment.
Importance of keynes employment can be discussed with the help of the following points.

1.​ Determination of employment.

​Keynes theory of employment helps in determining the equilibrium level of employment.
equilibrium level of employment is determined where aggregate demand curve intersect the
the aggregate supply curve and the point is known as point of effective demand.

2. Repudiation of say's law of markets.

Keynes theory of employment repudiates say's law of market that supply creates is own
demand. According to keynes supply does not creates it's on demand and therefore there is
unemployment in the economy.

3.Importance of investment.
Keynes theory of employment highlights the importance of of investment in in determining
the level of employment in the economy. According to keynes employment can be increased
by increasing investment therefore keynes theory of employment highlights the importance

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of investment increasing employment.

4 Important role of fiscal policy.

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keynes theory of employment show the importance of fiscal policy in determining
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employment according to games during depression government has to increase investment
in order to to increase employment. therefore keynes theory of employment highlights the
importance of fiscal policy in increasing employment in the economy.
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