Say's Law

Definition

Say's Law, also known as the law of markets, is an economic principle that states that the production of goods creates its own demand. It suggests that a general glut, or oversupply, in the economy is impossible because any increase in the supply of goods will be matched by a corresponding increase in demand.

5 Must Know Facts For Your Next Test

1. Say's Law suggests that supply creates its own demand, implying that a general oversupply or economic depression is impossible.
2. According to Say's Law, if producers increase the supply of goods, consumers will have more income to spend, leading to a corresponding increase in demand.
3. Say's Law is based on the assumption of full employment and the idea that all income earned is spent, leading to a balanced economy.
4. Keynesian economics challenged Say's Law, arguing that demand, not supply, is the driving force in the economy and that government intervention is necessary to maintain full employment.
5. The AD/AS model in macroeconomics incorporates both Keynes' Law (demand-driven) and Say's Law (supply-driven) to explain the determination of output and price level.

Review Questions

• Explain how Say's Law relates to the concept of macroeconomic perspectives on demand and supply.
  • According to Say's Law, the supply of goods creates its own demand. This implies that the economy will naturally reach a state of full employment and equilibrium, where aggregate supply equals aggregate demand. In the context of macroeconomic perspectives on demand and supply, Say's Law suggests that the economy is self-regulating and does not require government intervention to maintain full employment and balance between supply and demand.
• Describe how Say's Law and Keynes' Law are incorporated in the AD/AS model to explain the determination of output and price level.
  • The AD/AS model incorporates both Say's Law and Keynes' Law to explain the determination of output and price level. Say's Law, which emphasizes the role of supply in creating its own demand, is represented by the upward-sloping aggregate supply (AS) curve. Keynes' Law, which emphasizes the role of demand in driving economic activity, is represented by the downward-sloping aggregate demand (AD) curve. The interaction between the AD and AS curves determines the equilibrium output and price level in the economy, with the model allowing for both demand-side and supply-side factors to influence economic outcomes.
• Analyze the implications of the differences between Say's Law and Keynes' Law for government economic policies and interventions.
  • The fundamental differences between Say's Law and Keynes' Law have significant implications for government economic policies and interventions. Say's Law suggests that the economy is self-regulating and does not require government intervention to maintain full employment and balance between supply and demand. In contrast, Keynes' Law argues that government intervention, through fiscal and monetary policies, is necessary to manage aggregate demand and stabilize the economy. This philosophical divide has led to different approaches to economic policymaking, with Keynesian economics emphasizing the role of government in stabilizing the economy, while classical economics, based on Say's Law, favors a more hands-off approach and limited government intervention.

Related terms

Aggregate Demand:

The total demand for all goods and services in an economy at a given time and price level.

Aggregate Supply:

The total quantity of goods and services that firms are willing to sell at different price levels in an economy.

Keynesian Economics:

An economic theory that emphasizes the role of government intervention and active fiscal policy to manage aggregate demand and stabilize the economy.