Introduction:

keynes theory is based on empirical foundation and has policy implication. Keynes did not have much faith in laissez- faire policy and its automatic adjustment for optimization. Explanation of Keynes theory favored capitalism he suggested a reform in pure capitalism through government intervention in economic field of making necessary adjustment in order to ensure smooth operation of a free enterprise economy. Thus Keynes book in fact is a reputation of the foundation of laissez faire.

Keynes theory also indicates the mode of monitory and fiscal policy in different economic situations like inflation and deflation. Keynes policy measures like deficit financing are being adopted by many developing countries as a mean of development of finance. “Keynes  did not forget new tools of analysis Just for the love of tools making his ideas are operational significant and have been translated into action of statement.

Keynes explain the theory of employment on the basis of effective demand in his book ‘general theory of employment, interest and money’ His theory is based on short run it is assume that capital equipment, population or manpower, technical knowledge, labor efficiency remind constant. Keynes theory says that the quantity of employment depends on the level of income and output. If this factors are fixed the national income can be increased only by employing more labor. According to Keynes the increase in national income would mean increase in employment. The larger the volume of employment larger the national income. Keynesian theory of employment is based on the principle of effective demand.

Explanation:

Effective demand is that total demand which is equal to total supply. In another words effective demand is the point where aggregate demand curve and aggregate supply curve intersect. AD 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:

   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 receipts when a given volume of employment is offered to workers.

Aggregate Supply Function:

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.

Assumption:

• Perfect competition: There will be a high degree of competition in the markets
• Short period: The theory is based on the short period
• Operation of diminishing returns: There is the operation of diminishing returns to productive sources or increase in costs
• 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.
• Heroic aggregate: The relation aggregate like the national income saving and investment are better tools. In this diagram the curve AD represents ADF and the curve AS represent ASF. The two curves intersect each other. This is the point of effective demand at this point ADF and ASF are exactly balance.  ON is the employment available OR is the receipts.

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