Classical Economics
Classical economists relied on the Say's law which states that supply creates its own demand, which stemmed from the belief that wages,prices and interest rates are all flexible. This comes from the classical thought that the factor payments which are made to the various factors of production during the production process, would create enough income in the economy to create a demand for the products produced.
This supports the classical thought which revolves around Adam Smith's invisible hand which states that the markets would achieve equilibrium via the market forces that impact economic activity and thus there is no need for government intervention.Moreover, the classical economists believed that the economy was operating at a full employment Hence the classical Aggregate expenditure model is:
Aggregate Expenditure = Aggregate Consumption + Planned Investment
Therefore,
Where,
- C= Consumption Expenditure
- I = Aggregate investment ( Savings = Investment)
Classical economics has been criticized for its assumptions that the economy works on a full-employment equilibrium which is a false assumption as in reality, the economy operates at an under-employment equilibrium which provides the foundation for the Keynesian model of Aggregate Expenditure.
Read more about this topic: Aggregate Expenditure
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