Classical_Theory_of_Economics_Detailed.pptx

Classical_Theory_of_Economics_Detailed.pptx

• 1.
  Classical Theory ofEconomics • Foundations, Principles, and Key Thinkers – Prepared by: Marrium Khan – Date: August 2025
• 2.
  Introduction • Classical economicsrefers to the body of economic thought that emerged during the late 18th and early 19th centuries. – It emphasizes the efficiency of free markets, the importance of competition, and the idea that economies are self-regulating. – Key figures include Adam Smith (father of modern economics), David Ricardo (comparative advantage), Thomas Malthus (population theory), and John Stuart Mill (utilitarianism in economics).
• 3.
  Core Assumptions • Marketsare self-correcting due to the forces of supply and demand. – Prices, wages, and interest rates are flexible and adjust to restore equilibrium. – Economic agents act in their own self-interest, which collectively benefits society (the 'invisible hand'). – Government intervention should be minimal, limited to maintaining law and order and protecting property rights.
• 4.
  Say’s Law • Formulatedby Jean-Baptiste Say: 'Supply creates its own demand'. – When goods and services are produced, they generate income for producers, which is then spent on other goods and services. – This implies that general overproduction (glut) is impossible in the long run, as markets adjust automatically.
• 5.
  Saving and Investment •In the classical model, saving and investment are balanced through changes in the interest rate. – If savings exceed investment, interest rates fall, encouraging investment and reducing savings until equilibrium is restored. – If investment exceeds savings, interest rates rise, encouraging savings and reducing investment. – Both saving and investment are seen as functions of the interest rate.
• 6.
  Role of Government •The state should provide only essential functions: protecting property rights, enforcing contracts, maintaining law and order, and national defense. – It should avoid direct intervention in economic activities, allowing the market to allocate resources efficiently. – Taxation and regulation should be minimal to avoid distorting market incentives.
• 7.
  Employment Theory • Classicaleconomists believed that full employment is the normal condition of the economy. – Any unemployment is temporary and caused by market imperfections or external shocks. – Wage flexibility ensures that labor markets clear: if unemployment rises, wages will fall until full employment is restored. – No concept of involuntary unemployment in the long run.
• 8.
  Classical Growth Theory •Economic growth results from accumulation of capital, growth in the labor force, and technological improvements. – Adam Smith: Division of labor increases productivity. – Malthus: Population tends to grow faster than food supply, leading to resource constraints unless checked. – Ricardo: Diminishing returns in agriculture limit long-term growth potential. – J.S. Mill: Eventually, economies reach a 'stationary state' where growth stabilizes.
• 9.
  Criticism & Limitations •Fails to explain persistent unemployment during economic downturns. – Over-reliance on the interest rate as the mechanism for balancing saving and investment. – Neglects the possibility of demand shortages (which Keynes highlighted). – Rigid assumption of wage and price flexibility does not hold in the short run. – Ignores the role of government in stabilizing the economy during recessions.
• 10.
  Relevance Today • Influencesmodern supply-side economics and free-market policies. – Still used in discussions about deregulation, privatization, and free trade. – Say’s Law remains influential in some policy debates, although most economists accept that demand can sometimes be insufficient. – Forms the basis for neoclassical economics, which incorporates marginal analysis.
• 11.
  Classical vs. KeynesianEconomics • Classical: Focus on long-run supply, full employment, flexible prices, market self-correction. – Keynesian: Focus on short-run demand, possibility of unemployment, sticky prices, need for active fiscal policy. – Classical policy implication: Laissez-faire and minimal intervention. – Keynesian policy implication: Government spending and monetary policy to manage demand.
• 12.
  References • Smith, A.(1776). The Wealth of Nations. – Ricardo, D. (1817). Principles of Political Economy and Taxation. – Malthus, T.R. (1798). An Essay on the Principle of Population. – Mill, J.S. (1848). Principles of Political Economy. – Modern economics textbooks & academic articles.