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