Model employment resources

Up until the thirties among economists generally of the opinion that through the mechanism of free pricing economy automatically tends to equilibrium - where AD = AS.

Is it possible to achieve full employment with stable prices?

In modern macroeconomics consider the following areas:

A) Classic.

B) Keynesian.

The essence of the classical theory of employment is that, according to her society full employment of resources is the norm. This conclusion is based on the law of Jean-Baptist Say (according to which wages and prices are flexible, the production of goods creates income exactly equal to the cost of manufactured goods).

Economists - classic claim that Qs (supply) varies adequate changes in the price level. Because of the desire to get more revenue, the manufacturer will expand the production of goods, with an increase in costs - full time. To offset the additional costs incurred, sellers are forced to raise prices, and the increase in demand will not occur and the equilibrium output will remain the same - Qe.

Across the state it will act as a desire market to provide price stability, income, employment resources.

The main conclusion of the classical theory is that the capitalist economy is self-regulating. Aggregate supply determines the level of real output at full employment and aggregate demand - the price level.

The essence of Keynesian theory is the following: the economy may be poised for a significant level of unemployment and significant inflation. Full employment is casual.

The basis for the macro equilibrium in the economy is the aggregate demand, which can vary depending on changes in the price factor.

In the short term prices, wages are inelastic, so the total supply represented by the horizontal line.

Decline in aggregate demand leads to a decrease in GHP at constant prices. The decline in production leads to unemployment. If the GHP will be less than it should be (aggregate demand), the Company, seeking to take advantage of the phenomenon of selling at a lower price and attract more resources to expand production.

I.e. economy tend to equilibrium position. Although in this case, not price, and sales are the signal that tells us whether they should expand or curtail production.

In the Keynesian model of general equilibrium in the economy does not have to match that level of PPR, which allows you to ensure full employment of resources. On the contrary, the equilibrium can be achieved with the availability of resources, i.e. unemployment and inflation. To avoid huge losses from recessions and crises, needs strong macroeconomic adjustment policies of aggregate demand from the state, the basic tools which are: consumption, savings and investment.

So, summing up, we should note the following:

Macroeconomic equilibrium in the market is achieved by equality of aggregate demand and aggregate supply.

Striking a balance is possible in the long run by self-regulation of the economy through market mechanisms (classical theory of employment of resources), and through the intervention of the state and full employment of resources (Keynesian view).