Classical theory of

economics
by surbhi raghuwanshi

,
Definitionofclassical economics. A school ofeconomicthought, exemplified by Adam Smith's writings in the 18th century, that states
that a change in supply will eventually be matched by a change in demand - so that theeconomyis always moving towards equilibrium..

List of classical
economists..

1.Adam smith
The ideas that became associated with Smith not only became the foundation of the classical
school of economics, but also gained him a place in history as the father of economics. His work
served as the basis for other lines of inquiry into the economics field, including ideas that built
on his work and those that differed.

2, thomas Robert malthus;-

In his Principles of

Says Law

Political Economy, Malthus explained how he was against

,
by considering demand as an aggregate. Thus, if wages were to be maintained
at a subsistence level, aggregate demand would drop.

3.John stuart mill;-His Principles of Political Economy,

which is considered one of the most important contributions made by
theClassical school of economics,

4.David ricardo
David Ricardo(18 April 1772 11 September 1823) was a Britishpolitical economist. He was one
of the most influential of theclassical economists, along withThomas Malthus,Adam Smith, and
James Mill.[2][3]Perhaps his most important legacy is his theory ofcomparative advantage, which
suggests that a nation should concentrate its resources solely in industries where it
ismostinternationally competitive and trade with other countries to obtain products no longer
produced nationall

Viewpoints and models

>>classical

Classical

economics

economists assume that:-

supply creates its own demand.

{ says law}
_
_

wages and prices are flexible.

savings always equals investment,

Keynesian economics

John Maynard Keynes

aggregate spending helps determine the level of

macroeconomic activity.

Macroeconomy seeks an equilibrium output level.

Macroeconomic Equilibrium

. Amount of total planned spending on new goods

and services equals total output in the economy

If aggregate spending > current production, then

output, employment, and income will all increase.

inventories-: Stocks of goods on hand.

Allows for spending to exceed current production.

The

consumption and saving function

New classical economics:

Downward-sloping aggregate demand curve was explained through:

Interest Rate Effect

Interest rate moves with changes in overall prices.

An inverse relationship exists between the interest rate and the amount people borrow and
spend.
Wealth Effect

In order to maintain the same amount of accumulated

wealth, people spend less when prices rise and morewhen prices fall.
Foreign Trade Effect

A direct relationship exists between changes in overall

prices in an economy and spending on imports that diverts spending from domestically produced
output.