Keynes Theory of Employment:

The Keynes Theory of Employment explains with the principle called an effective demand. J.M. Keynes, father of modern economics criticize the classical theory of employment given by classical economist. He gave his own theory called The Keynes Theory of Employment. The direction of theory is that the volume of employment depends on the level of effective demand in the economy. Hence in employment theory may be described as the demand efficiency theory.

Broadly speaking Keynes Theory of Employment designated the term effective demand to denote the total demand of goods and services by the people in a community. There are two basic determinants of effective demand in an economy these are consumption and investment. The level of effective demand determines the level of employment which in turn determines the level of output and income in the economy. It follows the level of employment is fundamentally determined by consumption and investment.

Keynes sorted to explain the point of effective demand in a capitalist economy, free from government intervention, be considered consumption and investment expenditure of the community relating to private individuals and enterprises only.

Keynes Theory of effective demand:-

Effective demand is the point where aggregate demand curve and aggregate supply curve intersect each other. Aggregate demand is the total consumption expenditure and investment expenditure, as output income and employment increases aggregate demand increase for each level of employment and income there will be for responding level of aggregate demand but, all the aggregate demand not effective demand. Aggregate demand which is equal aggregates supply is effective demand. He explained his principle of effective demand using aggregate demand function or price which becomes effective because it is equal to aggregate supply price and thus represents a position of short run equilibrium.

Aggregate demand function or price:

  The aggregate demand function or price for the output of any given amount of employment is the total sum of money or proceeds which is expected from the sale of output produce when the quantity of labor is employed. The aggregate demand price represents the expected revenue when a given volume of employment is offered to workers.

Aggregate supply function or price:

The aggregates supply function is when any given number of workers is employed if the total cost of production of the output as a certain level of employment. It is the sum total of all payment made by entrepreneurs for all the factors of production producing the output. We can prepare an aggregate supply price schedule according to the total number of workers employed in the economy and we can have a corresponding aggregate supply price or aggregate supply function. The greater the amount of employment offered by the employees taken together to the workers in the economy.

Keynes Theory of Employment Graph.

Keynes Theory of Employment Assumptions:

• Absence of government part in economic activity: The government plays no significant part either as taxes or as a spender.
• A closed economy: There is absence of the influence of exports and imports.
• Static condition: The general theory does not trace out the effect of the future on the presence economic event clearly.
• Short-Run concept: Keynes’s theory primarily deals with the short run and the determination of income and employment within this period. He assumes that prices and wages are sticky and do not adjust immediately to changes in demand.
• Underemployment Equilibrium: Keynes assumes that the economy can settle at an equilibrium level of output and employment that is below full employment. This means that involuntary unemployment can exist due to insufficient aggregate demand.
• Importance of Aggregate Demand: Aggregate demand is the primary driver of economic activity. In contrast to classical theories, which emphasize supply-side factors, Keynes focuses on the role of demand in determining output and employment levels.
• Consumption Function: Consumption is a stable function of disposable income. The marginal propensity to consume (MPC) is less than one, meaning that people spend a portion of their additional income and save the rest.
• Investment Volatile: Investment is highly volatile and influenced by expectations and uncertainties about the future. The marginal efficiency of capital (MEC) and the interest rate are key determinants of investment decisions.
• Liquidity Preference: Individuals prefer to hold money (liquidity) for transactions, precautionary, and speculative purposes. The demand for money is influenced by interest rates, which in turn affect investment and consumption.
• Interest Rates and Money Supply: The interest rate is determined by the demand for and supply of money. Central banks can influence interest rates through monetary policy by adjusting the money supply.

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