All the labourers who are ready to work will find employment and all the factories will be working at their full capacity. When did this thinking change?

After the great depression of 1929

The correct answer is option 2: After the great depression of 1929

Before the Great Depression of 1929, classical economists believed that "supply creates its own demand," implying that all resources, including labor, would always be fully employed in a free market. It was assumed that any unemployment would be temporary and wages would adjust to restore full employment.

However, the Great Depression challenged this idea as unemployment remained persistently high, and factories remained underutilized despite falling wages. This led to the emergence of Keynesian economics, introduced by John Maynard Keynes, who argued that aggregate demand influences employment levels and that government intervention is necessary during economic downturns to restore full employment.