The Classical Economic Theory

Classical economic theories are the priority themes in this video. It mainly emphasizes the causes and effects of a classical theory principle. Also, generalizing what economics beliefs are and what impacts they have on society. Refers to the economy as being vulnerable. A Scottish philosopher, by the name of Adam Smith examines society relating it to a world of business affairs. He writes a book called “Wealth of Nations”, which is known as the starting point for classical economist’s theories. According to Wealth of Nations, (Adam Smith book) he believes that price wages and interest rates are considered to be flexible. Classical economists strongly believe that the economy is self- regulating. If there is an increase in spending, aggregate

A reduction in aggregate demand would automatically lead to falling prices and falling wages, therefore, real GDP would be maintained and employment will not fall. A higher aggregate demand leads to inflation. Classical economist believes that Say’s law and the role of flexibility would guarantee that spending would be enough to keep full employment. These classical economists’ strongly believe that supply creates its own demand. Therefore, in the manufacturing process of producing goods, many businesses also create enough revenue to confirm that all the goods are sold. Bottom line is, that when businesses produce goods, they generate an income, paying their suppliers for different economic resources. For example, a business that produces $200 worth of goods to sell to consumers must first obtain the different economic resources that are required for certain goods. The supplier of the different economic resources expects to get paid in wages. Therefore, $200 in income payments goes to the suppliers. If the consumer spends all the revenue received, everything that was produced will be sold. Relating back to the concept, supply will have created its own demand. They don’t consider in having an overall surplus of goods and services throughout the economy. However, they do realize

The theory that stands out more, is supply creates its own demand. I can relate to this theory, because I had purchased a car two years ago and I was put in a situation where my demand was significantly high. Later on, I realized that I could of gotten my car cheaper. But the lack of supply for that particular car and the features it made the demand to be crucially important. In this case, I wanted to buy a car, at the same price that many others want to buy a car. But the dealership may not want to produce or import as many cars as we wanted. Therefore, our frustration may build up and leads to making an irrational and poor decision to