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CLASSICAL MACROECONOMICS Classical macroeconomics is the theory and the classical model of the economists Adam Smith David Ricardo John Mills and Jean Baptiste Say Below the assumptions of the classical macroeconomics are described 1 Assumptions Competitive markets Classical theories all make many assumptions about the markets and their competitivenessthese assumptions are that all the markets are easy to enter and exit No monopoly elements are present in the market to prevent newcomers from entering the market or stopping the present ones from quiting the market Pricess and wages are flexible in both upward and downward directions according to the demand and supply forces No single seller or buyer of a product has sufficient market power to influence the industry price nor does any supplier or purchaser of labor services have sufficient market power to influence the market wage rate Thus all economic agents are price-takers and not price-setters Because the markets are competitive a disequilibrium can only exist for a short period of time which economists call the short run The firm can not change some of its aspects of operation So every firm has some fixed inputs while the pricess and the wages are changing and flexible So if for some reason the product market were experiencing excess demand in some industry with quantity demanded greater than quantity supplied prices would rise until quantity demanded once again equaled quantity supplied The rise in price returns the market to equilibrium On the factor side if there were an excess supply of workers wages would decline until equilibrium in the labor market was restored and everyone who wanted to work can find a jobwhich is called the full employment Perfect information In classical theory all economic decision-makers are assumed to be operating by having all the information they needed to make the best decisions The cost of acquiring information transactions costs are so low that they can be assumed to
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