KEYNES THEORY OF EMPLOYMENT

An Outline
 What was t
THOUGHT he KEYNES
about Emp
and Income loyment
theory!!!
John Maynard Keynes

• He wrote in his book , “GENERAL THEORY OF EMPLOYEMENT, INTEREST AND MONEY” in which he challenged the validity
of classical theory of employment. He propounded a new theory of Income and Employment.
• He invented new tools to understand this theory like Propensity to Consume, Multiplier, Marginal efficiency of Capital
and Liquid Preference.
• It is a short run theory because he assumes that the amount of capital, the size of population and labour force, technology,
efficiency of labourers, etc.,do not change.
• That’s why the amount of employment depends on the level of National Income & Production.
• Higher the level of National Income, the greater the amount of employment; lower the level of National Income , then
lower the amount of employment.
• He also assumes that Prices and Wages do not adjust quickly to balance demand and supply. Therefore, in his theory of
income and employment he assumes that prices and money wages remain constant.
KEYNES’S THEORY ON EMPLOYMENT:
PRINCIPLE OF EFFECTIVE DEMAND

• In capitalist economy, the level of employment depends upon the Aggregate

Effective Demand, the greater the level of Effective Demand, the greater the
level of Employment.
• In the whole economy, How many men will employed by firm depends upon
the fact that they make their Individual Profit. (or maximum profit for firm as
well)

Effective demand:
Aggregate Supply = Aggregate Demand
 AGGREGATE SUPPLY FUNCTION (C + S)
• When an entrepreneurs employ some people they incur some COST OF PRODUCTION. Sale of output produced by
certain number of people employed is greater than the Cost of Production incurred, it will be worthwhile to employ
them.

• The cost of production incurred on the employment of a certain number of labourers must be received by the
entrepreneur, other wise they will not produce and provide and employment.

• Aggregate Supply Price is the total amount of money which all the entrepreneurs in the economy taken together must
expect to receive from the sale if the output produced by the given number of labourers employed.
• If cost of production will not recovered by the entrepreneur in employing a certain number of labours they will reduced
the employment.
• In other words, Keynes’s aggregate demand function (curve) shows the relationship between the number of workers
employed and the aggregate supply price.
• (C) and the other part is saved (S) in the form of inventories of unsold output. The aggregate supply curve,
(C+S) is positively sloped indicating that as the level of employment increases, the level of output also
increases, thereby, increasing the aggregate, supply. Thus, the aggregate supply (C+S) depends upon the level
of employment through4he economy's aggregate production function.
 AGGREGATE DEMAND FUNCTION

• Since Keynes assumes the aggregate supply function to be stable, he concentrates his entire attention
upon the aggregate demand function to fight depression and unemployment. Thus employment
depends on aggregate demand which in turn is determined by consumption demand and investment
demand.
• AD play is very important role in the determination of employment. Aggregate demand function shows
for each possible level of