1. Say’s Law of Markets

2. 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.”

3. 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.

4. 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

5. 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.

6. 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.

7. 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

8. 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