SAY’S LAW OF MARKET

Ø  SAY’S LAW OF MARKET

Ø  MACRO ECONOMICS

Ø  SHASHI AGGARWAL ECONOMICS AND LAW CLASSES

Ø  HINTS HOW TO WRITE IN THE EXAMINATION ( ATTEMPT QUESTION IN 35 MINUTES)

1. 1.     INTRODUCTION TO SAY’S LAW AND LOGIC OF SAY’S LAW
2. 2.     ASSUMPTIONS
3. 3.     APPLICABILITY OF SAY’S LAW OF MARKET ( VERY BRIEF)
4. 4.     BRIEFLY MENTION MODERN STATEMENTS OF LAW OF MARKET
5. 5.     IMPLICATIONS VERY BRIEFLY . EXPLAIN IN ONE OR TWO LINES
6. 6.     CRITICISM ONE LINE EXPLANATION

• INTRODUCTION

1. CLASSICAL THEORY IS BASED ON SAY’S LAW OF MARKET. THE SAY’S LAW OF MARKET PROVIDED THE BASIC CONDITION ON WHICH MACRO ECONOMIC FRAMEWORK IS BASED. THE FUNDAMENTAL CONCLUSION OF CLASSICAL ECONOMISTS IS THAT ECONOMY WILL ACHIEVE ITS FULL EMPLOYMENT AUTOMATICALLY BY THE FREE FLOW OF MARKET FORCES WITHOUT STATE INTERVENTIONS.
2. SAY HAS GIVEN BRIEF LAW RELATING TO MARKETS IN HIS BOOK TITLED" ECONOMIQUE POLITIQUE
3. SAY’S LAW OF MARKETS ,’ SUPPLY CREATES ITS OWN DEMAND.”IN THE WORDS OF J.B. SAY ,” IT IS PRODUCTION WHICH CREATES MARKET FOR GOODS.”
4. HE BELIEVED THAT IN THE LONG RUN THERE IS A TENDENCY TOWARDS EQUALITY OF AGGREGATE DEMAND AND AGGREGATE SUPPLY AND THEREFORE OF OVERPRODUCTION IS NOT POSSIBLE.

• BASIC ARGUMENT OF SAY’S LAW OF MARKET

1. THE LAW STATES THAT A PERSON WILL PRODUCE A COMMODITY FOR TWO PURPOSE EITHER HE WILL CONSUME IT HIMSELF OR HE WILL EXCHANGE FOR OTHER COMMODITIES. IN THIS WAY AS MUCH A PERSON SUPPLIES SO MUCH IS HIS DEMAND. SUPPLY IS EQUAL TO DEMAND.
2. THE LAW ASSERTS THAT EVERY PRODUCER SUPPLIES HIS GOODS IN THE MARKET IN ORDER TO GET OTHER GOODS IN EXCHANGE FOR THEM. WHENEVER A PRODUCER PRODUCE GOODS IN THE MARKET HE PAYS REMUNERATION TO THE FACTORS OF PRODUCTION IN THE FORM OF WAGES,INTEREST,RENT AND PROFIT. THESE PAYMENTS CONSTITUTE THE INCOME OF THE FACTORS. THIS INCOME IS USED TO DEMAND THE GOODS PRODUCED.. LEVEL OF DEMAND MATCHES LEVEL OF SUPPLY.

• ASSUMPTIONS

1.     PERFECTLY COMPETITIVE ECONOMY

2.     FLEXIBLE PRICES

3.     MONEY AS A VEIL: MONEY IS MEDIUM OF EXCHANGE

4.     NO HOARDINGS:ALL MONEY IS SPENT.

5.     STATE IS NEUTRAL:STATE DOES NOT INTERFERE

6.     UNLIMITED OPPORTUNITIES FOR LABOUR AND CAPITAL. SUPPLY OF LABOUR AND CAPITAL IS ELASTIC

7.     AS THE VOLUME OF GOODS GOES ON INCREASING,THE SIZE OF THE MARKET WILL GO ON EXTENDING

8.     LONG PERIOD

9.     PRODUCTION ACCORDING TO CONSUMER’S PREFERENCE

• EXPLANATION OF SAY’S LAW OF MARKETS

1. SAY’S LAW AND BARTER ECONOMY: APPLIES TO BARTER ECONOMY. WHENEVER A PRODUCER BRINGS GOODS TO THE MARKET FOR SALE OR CREATES SUPPLY IN ORDER TO GET OTHER GOODS N EXCHANGE
2. SAY’S LAW AND MONETARY ECONOMY:ALSO APPLIES TO MONETARY ECONOMIES.ACCORDING TO THEM MONEY SERVES ONLY AS MEDIUM OF EXCHANGE. WHENEVER A PRODUCER SELLS HIS PRODUCT HE GETS HIS INCOME IN TERMS OF MONEY. HE WILL SPEND THIS MONEY TO BUY OTHER GOODS AND SERVICES

• MODERN STATEMENT OF SAY’S LAW OF MARKET
• OSCAR LANGE AND PROF PIGOU HAS PREPARED SAY’S LAW IN TERMS OF IDENTITY AND EQUALITY RESPECTIVELY.
• ∑P₁D₁ ΞΞ ∑P₁S₁

• AGGREGATE DEMAND = AGGREGATE SUPPLY
• EXPLANATION OF SAY’S LAW BY PIGOU

1. FORMED IN THE EQUALITY FUNCTION AND SAY’S LAW IS APPLICABLE UNDER CERTAIN CONDITIONS ONLY. IT WILL APPLY ONLY WAGE RATE IN LABOUR MARKET AND INTEREST RATES IN MONEY MARKET ARE PERFECTLY ELASTIC. ∑P₁D₁ = ∑P₁S₁
2. N = QY/ W   
3. QY MEANS THAT PART OF NATIONAL INCOME WHICH IS PAID AS WAGES
4. W = WAGE RATE
5. IT INDICATES IF THE PART OF NATIONAL INCOME WHICH IS PAID AS WAGES QY REMAINS CONSTANT THE FALL IN WAGE RATE ALONE CAN INCREASE THE LEVEL OF EMPLOYMENT AND ACHIEVE FULL EMPLOYMENT IN SITUATION

• IMPLICATION

1. GENERAL OVER PRODUCTION IS IMPOSSIBLE
2. GENERAL UNEMPLOYMENT IS IMPOSSIBLE
3. PARTIAL OVERPRODUCTION AND PARTIAL UNEMPLOYMENT IS POSSIBLE
4. USE OF UNEMPLOYED RESOURCES PAY FOR ITSELF
5. AUTOMATIC ADJUSTMENT
6. EQUALITY BETWEEN SAVING AND INVESTMENTS
7. POSSIBILITY OF UNLIMITED OUTPUT AND GROWTH OF CAPITAL
8. MONEY IS  A VEIL
9. POLICY IMPLICATION THAT GOVERNMENT SHOULD NOT INTERFERE.
10. OTHER IMPLICATIONS:-
1. SIZE OF THE MARKET AND EMPLOYMENT GO TOGETHER
2. PROSPERITY IS INDIVISIBLE
3. SUPPORTED FREE TRADE POLICY
4. PRODUCTION SHOULD BE GIVEN MORE IMPORTANCE THAN CONSUMPTION

• CRITICISM

1. GENERAL OVERPRODUCTION IS POSSIBLE:KEYNES AGGREGATE DEMAND DEPENDS UPON CONSUMPTION DEMAND AND INVESTMENT DEMAND. THE INCOME WHICH IS NOT CONSUMED IS SAVED. IF THAT IS NOT INVESTED THEN AD IS LESS THAN AS.
2. GENERAL UNEMPLOYMENT IS POSSIBLE : WAGE CUT IS DOUBLE SWORD.IT REDUCED THE RICE OF THE COMMODITY AND ALSO REDUCES THE INCOME OF THE LABOUR WHICH IN TURN REDUCES THE EFFECTIVE DEMAND
3. LACK OF AUTOMATIC ADJUSTMENTS: GOVERNMENT INTERVENTIONS
4. NOT LOGICAL  THAT AGGREGATE DEMAND IS EQUAL TO AS.
5. NO EQUALITY BETWEEN SAVING AND INVESTMENTS IT IS NOT BROUGHT BY CHANGES      IN THE INTEREST RATE BUT BY CHANGE IN THE LEVEL OF INCOME
6. MONEY IS NOT MERELY A MEDIUM OF EXCHANGE
7. TRADE CYCLE
8. DOES NOT OFFER ANY LOGICAL PROBLEMS TO SHORT RUN