Download Say`s Law of Markets

Say’s Law of Markets
Say’s Law
J B Say: Classical Economist
 Propounded a brief law relating to
markets in his famous book: Traite d’
‘Economique Politique’
 This law is known as Say’s law of markets
 J B Say says, “ Supply creates its own
demand.”
 He says, “ it is production which creates
market for goods.”

The act of production generates income in
form of rent, wages, interest and profit.
 By providing income to factors of production
supply generates its own demand.
 Any increase or decrease in supply will bring
proportionate increase or decrease in
purchasing power of household. As a result
there will be equi proportionate increase or
decrease in demand in the economy.
 So level of demand is always matched by level
of supply.

Assumptions of Say’s Law of
Markets
 Perfectly
competitive
market
 Flexible Prices
 Money- a veil
 No Hoarding
 State is neutral
Unlimited
Opportunities for
labour and capital
 The large extent
of market
 Long period
 Production
according to
consumer’s
preference

Explanation of Say’s Law of Markets
Barter Economy: In
barter economy when
a producer brings
product to market for
sale this is done to get
other goods in exchange
from market. So supply
always represents
demand for other goods
 So every seller is a buyer
also. Supply creates its
own demand in barter.


Monetary Economy: In
such economies
money acts as a
medium of exchange:
Classicals. So seller
sells his product in
market, gets money in
return and buys other
goods and services
with it. The value of
demand so created will
be equal to value of
supply.



Monetary Economy with savings: In real life
people do not spend their entire income on
goods and services. They do saving also. As a
result aggregate demand in the economy falls to
the extent of savings effected.
However, classicals held the view that this law still
applies despite of savings in the economy. Because
people convert their savings into investment. As a
result AD= C plus I.
If due to certain reasons, savings is more than
investment, then rate of interest will change in
such a manner that saving will become equal to
investment. Concluding, Say’s law applies to
monetary economy also.
Implications of Say’s Law





General
overproduction is
impossible
General
unemployment is
impossible
Partial over
production and partial
unemployment are
possible.
Use of unemployed
resources pay for itself
Automatic adjustment






Equality between
saving and investment
Possibility of unlimited
output and growth of
capital
Money is but a veil
Policy implications
Say’s own observations
Quantity theory of
money and Say’s law
Criticism of Say’s Law





General over
production is possible
General
unemployment is
possible
Lack of automatic
adjustment
Say’s law is not logical
Equality between
saving and investment





Money is not merely
medium of exchange
Need for state
interference
Trade Cycles
Long term equilibrium
Under employment
equilibrium is possible