Transcript Say`s Law of Marketsx

SAY’S LAW OF MARKETS
SAY’S LAW OF MARKET
Say’s law states that “supply creates its own demand”.
 Every producer supplies his goods in market in order to
get other goods in exchange.
 Producer have to pay remuneration for the factor of
production.
 According to say, increase or decrease will bring
increase or decrease on purchasing power of the
households.

DEFINITIONS :o
o
According to J.B.SAY : supply creates its own
demand.
According to J.S.MILL : consumption cp-exists
with production. Production is the cause, the sole
cause of demand. It never furnishes supply
without furnishing demand, both at the same
time and to an equal extent.
ASSUMPTIONS OF SAY’S LAW OF
MARKETS:
a)
b)
Perfectly Competitive Economy: The law
assumes perfect competition in all markets.
Under perfect competition if the demand and
supply of factors and commodities are not equal
than their prices will be change.
Money-a Veil : Another assumption of this law
is that money is only medium of exchange.
Infact, Goods are exchange for goods. In other
words money is a only veil.
No Hoarding: the law further assumes that people spent all the
money they get .i.e. nothing is hoarded. All income is spend either on
consumption or capital goods. Savings is always equal to
investment.
State is Neutral : it is also assume that state does not interfere with
the activities of the economy in any manner. Forces of demand and
supply will bring out the equilibrium in the economy. There is
automatic adjustment of economic parameters.
Unlimited opportunities for labour and capital: supply of both labour
and capital is perfectly elastic. Supply of labor can increase to any
extent and in any proportion in an enterprise.
EXPLANATION :
a)
Say’s law and barter economy :it is necessarily
applies to barter economy. Where producer
brings goods to the market for sale, he does so
in order to get goods in exchange. Every
production activity demand for some other
goods. By supply reating its own demand is
meant
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IMPLICATIONS OF SAY’S LAW
Full employment
Policy
implications
Saving as a
virtue
Proper utilization
Of resources
Say’s own observations
Perfect
competition
FULL EMPLOYMENT IN THE
ECONOMY

The law is based on the proposition that
there is full employment in the economy.
Increase in production means more
employment to the factors of production.
Production continues to increase until the
level of full employment in reached. Under
such a situation the level of production will
be optimum
UTILIZATION OF RESOURCES &
SAVING
Proper
Utilization of
Resources

If there is full
employment in the
economy then
resources will be
properly utilized
and generate more
and more

 Saving
as a
Social Virtue
All factor income is
spent in buying which
they help to produce.
Whatever is saved is
automatically
invested for further
production. In other
words, saving is a
social virtue.

Perfect competition
Size of the market
Adjustment Mechanism
Role of Money
PERFECT COMPETITION SAY’S LAW OF MARKET IS BASED
ON THE PROPOSITION OF PERFECT COMPETITION IN
LABOUR AND PRODUCT MARKETS.
 Size
of the Market – According to Say’s Law,
The size of the market is large enough to
create demand for goods. Moreover, the size if
the market is also influenced by the forces of
demand and supply of various inputs.
 Role
of Money as Neutral – The law is based
on the proposition of a barter system where
goods are exchanged for goods. But it is also
assumed that the role of money in neutral.
Money does not affect the production process.
AUTOMATIC ADJUSTMENT
MECHANISM
there is automatic and self adjusting
mechanism in different markets. In capital
market, the equality between saving and
investment is maintained by rate of interest
while in the labour market the adjustment
between demand and supply of labour is
maintained by the wage rate.
LAISSEZ FAIRE POLICY

The law assumes a closed capitalist
economy which follows the policy of
laissez faire. The policy of laissez faire
is essential for an automatic and selfadjusting process of full employment
equilibrium.
OVER PRODUCTION
&UNEMPLOYMENT

PARTIAL OVER
PRODUCTION
Anticipations of the
producers regarding
demand for
particular goods are
not correct
 Then supply of it
may be more or less
than the demand.

PARTIAL
UNEMPLOYMENT
 It implies that if
there is over
production of one
good there may be
under production of
the other leads to
partial
unemployment.

SAY’S LAW IMPLICATIONS
 Say’s
himself drew 4 Implications of his law
 Size of the market & employment go together
 Wider the extent of the market , greater will
be the demand for goods
PROSPERITY IS INDIVISIBLE
It means, if the income of one individual
increases it will lead to increase in the income
of the other individual, because expenditure of
one is income of the other.
So we should take interest in the prosperity of
the other people.
 Imports
do not
 Production
harm

Imports do not harm the
industries of a country
rather increased imports
encourage exports
resulting in more
production and more
employment , therefore
supported FREE TRADE
POLICY
more
Important

It’s the aim of good
government to stimulate
production and of bad
government to encourage
consumption
CRITICISM
1)
OF THE SAY’S LAW
General over-production is possible:
Lord Keynes has proved that general over-production is
possible in economy. According to Keynes, aggregate
demand is determined by consumption demand and
investment demand. That part of income which is not
consumed is saved. If the saving is fully invested,
aggregate demand will be equal to aggregate supply.
However , it is not likely, because those who save and those
who invest are different persons. It may not be possible the
investment-decision of those who invest and the saving
decision of those who save should be identical.
2) General unemployment is possible:
The implication of say’s law that general unemployment is not
possible has also been criticized by Lord Keynes. According to
Keynes, general unemployment is possible. According to Keynes,
wage-cut is a double edged sword. On the one hand, it
reduced cost or price of the commodity produced and on the
other hand, it reduced the income of the labourers as well
which, in its turn, reduces effective demand. Fall in effective
demand will cause fall in production and employment. Thus,
instead of removing unemployment, wage-cut may actually
aggravate unemployment situation.
3) Lack of automatic adjustment:
According to Keynes , there is automatic adjustment only when
demand and supply adjust themselves or what is saved is fully
invested. It is not necessary that change in price-level will
invariably lead to change in demand and supply. Similarly,
it is not necessary that whatever is saved out o9f current
income must invariably be invested, because investment
opportunities are always limited. Its is possible that a person
may like to spend his saving in increasing his wealth or to
hold it in liquid form. Hence, the implication of say’s law that
every system is self-adjusting is wrong.
4) Say’s law is not logical:
Say’s law is logically incorrect. Its logic that aggregate
demand will always be so much as to buy all the goods
produced, is not correct. Proving this logic as wrong Keynes
holds that aggregate demand can be divided into two parts:
(i) consumption demand and (ii) investment demand. Both
these parts of total demand depend upon different factors. It is
not necessary that whe3n income increases, the consumption
and investment should also increase in the same proportion.
In reality, increase in income is followed by less than
proportionate increase in consumption expenditure.
5) Equilibrium between saving and investment:
According to Keynes, it is not necessary that saving and
investment decisions should always be identical. Keynes was of
the opinion that equilibrium between saving and investment is
not brought about by change in rate of interest but by change
in the level of income. Thus, it is not necessary the planned
savings should be equal to planned investment though ex –post
savings are always equal to ex -post investment.
6) Money is not merely a medium of exchange:
Say’s law is based on the assumption that money serves merely
as a medium of exchange. It is no effect on economics
activities. It is just a veil that helps in the exchange of goods.
But Keynes and other economists do not agree with this line of
argument. According to them, money is not merely a medium
of exchange but also a store of value. Everybody stores wealth
in the form of money. If wealth is hoarded the aggregate
demand will fall short of aggregate supply. Thus, money is not
a neutral parameter but an effective variable in an economy.
7) Need for state interference:
According to Keynes, poverty and unemployment are the
outcome of social and economic evils. On one side there is
plenty of wealth and on the other there is abject poverty. It is
because of inequality that the economy is in a state of
disequilibrium, demand and supply are not equal, there is
deficiency of investment and problems like over-production,
and unemployment spring up in the economy. Government
interference does not imply end of capitalism, but its
reformation.
8) Long-term equilibrium :
Say’s law is based on the assumption of long term
equilibrium. In the long-run. It may be possible that
aggregate demand may increase to become equal to
aggregate supply. In the long-run, free forces of the market,
under competition , may bring about equilibrium between
demand and supply, but Keynes asserted that it is the shortrun and not the long-run equilibrium that is of great
significance in our life.
9) Trade cycles:
If we go by say’s law, the economy should not suffer from
any trade cycles. The economy should generally be in
equilibrium. But in reality every economy is subject to
fluctuations. Sometimes it has to pass through a period of
boom and at another time through a period of depression.
Say’s law fails to capture the impact of trade cycles on
economic activity.
10) Application of partial equilibrium to general
equilibrium:
Say’s law in fact applies partial equilibrium analysis to the
economy as a whole and that is the reason why its
implications prove to be wrong. In the words of Hansen, “the
fundamental fallacy in say’s doctrine is that partial
equilibrium analysis which could apply to a particular
industry, has been extended to an economy as a whole.”
For instance, a firm can increase employment by reducing
the money-wages, because the demand for the products of
that firm does not depend on the labourers working in the
firm alone but also on the labourers working in other firms.
But, if all firms reduce wages simultaneously, the total
income of the labourers will go down. It will lead to fall in
aggregate demand on the part of the labourers. Thus, a
policy which is beneficial to a firm may prove detrimental if
applied to the economy.
11) Under-employment equilibrium is possible:
Say’s law holds equilibrium is possible only under full
employment situation but Keynes maintains that
equilibrium is possible even under less than full employment
situation. As a matter of fact, under-employment
equilibrium is a real situation.
In short, Hansen has rightly said about say’s law, “ As a
broad generalisation, this statement presents in the large a
picture of exchange economy. But the history of thought
illustrates again and again how great living principles,
tossed on the sea of controversy is likely to lose it vitality.
Too often it may be applied, as a tool of analysis to highly
complex problems for which it is unsuited, misleading
conclusions inevitably emerge. This is what happened to
say’s law.”
The End