Learn about Say’s Law economics and how supply creates its own demand. Explore the implications for modern economic theory and policy.
“Supply Creates its Own Demand”
This expression is a summary phase for say’s belief that in the long run there is a tendency towards equality of aggregate supply and aggregate demand and thus a general over supply or glut is not possible.
5 Basic Assumptions of Say’s Law Economics.
The law can operate only in a free exchange economy where there is perfect freedom for the buyers to buy and seller to sell. There prevails perfect competition and there are no restrictions imposed either on the producers or on the consumers and there is no price central.
There is a free flow of money incomes. As these incomes are received they are immediately spent. Even savings must be invested and spent on acquiring producer’s goods.Savings are equal to investment and this equality is brought about by flexible interest rate.
The government follows the policy of laissez – faire economy and does not interfere in any manner with the operation of the market forces.The size of the market is limited by the volume of production: only then will demand equal supply or supply creates its own demand.
According to Say the means of payment for commodities are commodities themselves. Each person’s means of paying for the production of other people consists of those which he himself posses. All sellers are buyers. If we double the supply of commodities in every market, by the some stroke we double the purchasing power.
Every one would bring a double demand as well as supply: everybody would be able to buy twice as much because every body would have twice as much to offer in exchange.
An over supply in one market will result in a falling price but this is just the proper signal in free markets for these producing this good to produce less or transfer their resources to the production of some other good.The importance of Say’s law comes from the fact that it filters the classical model via the quantity theory of money to I if Ip explain the valuation of goods & services.
Implications of Say’s Law Economics.
From the study of Say’s law some conclusions logically follow The following are its main implications.
Self Adjusting Economic System:
One of the implications of Say’s law is that the economic system is self – adjusting and functions automatically without beingk directed by any controlling authority. If there is any disequilibrium, it will be temporary and there is a persistent tendency for the equilibrium to be lestored. For instance, if there is over production prices will fall demand will increase and extra supply will be cleared Laissez – Faire Economy:
An important policy conclusion that follows from Say s law is that government should act on the policy of laissez fair.
Full Employment Level:
According to Say’s law there is always full employment level. Whenever there is unemployment ways are reduced and unemployment removed Full employment level obtained in classical economy through flexible wage system. Because in classical economy labour market is perfectly competitive and wages are flexible in downward and upward direction. So the economy always work at full employment level.
Never Lack of Aggregate Demand.
There is never lack of aggregate demand Savings may appear for a short period of time but they are equally matched by investment spending at this aggregate demand becomes equal to aggregate supply.
Supply Creates Its Own Demand:
This becomes true in barter economy when goods are exchanged with each other and economy is non – monetised
