... adjusts to voluntary full employment equilibrium * Supply causes demand, therefore, concentrate on supply * Direction of causation is from the labour market to aggregate supply REAL SIDE MONETARY SIDE AS Aggregate Supply AD Aggregate demand w/p Real wage w money wage O Output/real income p price level N Employment Classical Labour market demand and Aggregate Supply Labour market demand DN = firms demand for labour MPP = marginal physical product w = MPP x P DN curve is downward sloping because MPP diminishes with fixed capital and technology due to the law of variable proportions. SRAPF = short run aggregate production function for labour O = output. Output is a function of N. Labour market supply SN = supply of labour MDU = marginal disutility of labour MDU = w/p SN curve has a positive slope because work is assumed undesirable. It is a trade off with leisure. LABOUR MKT The above diagrams show Classical Output and Employment Theory. Model a) * Depicts labour market equilibrium real wage (w/p) 0 at equilibrium point ...

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