Title Chapter 2 Development of monetary theory.docx ✅

3 Graphically, it can presented as SL W/P SL O Above, figure shows the +ve relationship between number of employed labor (N) and real wage rate (w/p). d) Equilibrium of real sector When the demand for labor and supply of labor equal to each other it gives real sector equilibrium. Both are the function of real wage rate (w/p). If we plot DL and SL on same graph, then we get equilibrium level of employed labor (N) and equilibrium real wage rate (w/p). Mathematically it can be written as D L = S L .............. (iii) Graphically, N W/P DL O SL N Q Q = F(N) O N0 W/P0 Q0 N0 E
4 There is no condition of excess supply (i.e. unemployment) or excess demand (i.e. scarcity of labor). As the real wage will adjust itself (i.e. at point E) due to assumption of wage price flexibility. c) Production function The production function is based on law of variable proportion. The level of output is a function employed labor (employment). As we have assumed to be labor is a single variable factor of production. Mathematically it can be written as, Q = f (N), f' > 0  it implies MP L is increasing. f"< 0  implies MPL L is increasing decreasing rate. N Q Q = F(N) O Above figure, shows that production function based on law of variable proportion (Short run) e) Determination of output and employment The determination of output and employment of an economy on the basis of classical theory is based on 2 function i.e. production function (i.e. Q = f (N) and Labor market equilibrium (i.e. DL = SL). Therefore in this determination process of process of output and employment money has no role to play in an economy. Graphically it can be present as: