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By the end of this section, you will be able to:
  • Explain Say’s Law and determine whether it applies in the short run or the long run
  • Explain Keynes’ Law and determine whether it applies in the short run or the long run

Macroeconomists over the last two centuries have often divided into two groups: those who argue that supply is the most important determinant of the size of the macroeconomy while demand just tags along, and those who argue that demand is the most important factor in the size of the macroeconomy while supply just tags along.

Say’s law and the macroeconomics of supply

Those economists who emphasize the role of supply in the macroeconomy often refer to the work of a famous French economist of the early nineteenth century named Jean-Baptiste Say (1767–1832). Say’s law    is: “Supply creates its own demand.” As a matter of historical accuracy, it seems clear that Say never actually wrote down this law and that it oversimplifies his beliefs, but the law lives on as useful shorthand for summarizing a point of view.

The intuition behind Say’s law is that each time a good or service is produced and sold, it generates income that is earned for someone: a worker, a manager, an owner, or those who are workers, managers, and owners at firms that supply inputs along the chain of production. The forces of supply and demand in individual markets will cause prices to rise and fall. The bottom line remains, however, that every sale represents income to someone, and so, Say’s law argues, a given value of supply must create an equivalent value of demand somewhere else in the economy. Because Jean-Baptiste Say, Adam Smith , and other economists writing around the turn of the nineteenth century who discussed this view were known as “classical” economists, modern economists who generally subscribe to the Say’s law view on the importance of supply for determining the size of the macroeconomy are called neoclassical economists    .

If supply    always creates exactly enough demand at the macroeconomic level, then (as Say himself recognized) it is hard to understand why periods of recession and high unemployment should ever occur. To be sure, even if total supply always creates an equal amount of total demand, the economy could still experience a situation of some firms earning profits while other firms suffer losses. Nevertheless, a recession    is not a situation where all business failures are exactly counterbalanced by an offsetting number of successes. A recession is a situation in which the economy as a whole is shrinking in size, business failures outnumber the remaining success stories, and many firms end up suffering losses and laying off workers.

Say’s law that supply creates its own demand    does seem a good approximation for the long run. Over periods of some years or decades, as the productive power of an economy to supply goods and services increases, total demand in the economy grows at roughly the same pace. However, over shorter time horizons of a few months or even years, recessions or even depressions occur in which firms, as a group, seem to face a lack of demand for their products.

Questions & Answers

it is the situation where by im a market there is only one supplier and producer of a certain comodity that has no close substitute or competitor
Sepiso Reply
yes
Alhaji
what is demand and supply
Alhaji
what is Economics?
Pintu Reply
Is the study of human behaviour as a relationship between ends and scares mean which have alternative use
Alhaji
yes
Tawa
what is monopoly
Alhaji
what are the difficultés if retail prix index for calculating thé value of money
Oscar
hmm OK wait
Castino
what is labour
Mamudou Reply
LABOUR is a measure of work done by human being
Blessing
It is all form of human effort use to utilize in production
Alhaji
Why is scarcity a foundermental problem in economics
Alhaji
Why is scarcity a foundermental problem in economics
Alhaji Reply
scarcity occur unbalance demand and supply at this time cost goods increase then inflation very increase
Tesfaye
scarcity is a foundermental problem because its a natural situation and it affects the world at Large.in other words,it's limit in supply relating to deman
Akwosih
'Economics is about making choices in the presence of scarcity"
manoj Reply
. 'Economics is about making choices in the presence of scarcity" - Dscuss.
manoj
describe the producer's scarce resources.. I.e land,Labour,capital and enterprise
Alfhah Reply
short in supply
Charles
What are human behaviour?
Regina Reply
the rationality in decision making
Charles
how can you describe economic goods in a much better easier way?
Alfhah Reply
any thing that have utility
Charles
what is deman and supply
Aruna Reply
Demand can be defined as the ability and willingness to buy commodities in a given price of goods and services in a particular period of time
Alasana
supply refers to the ability and willingness to offered commodities for sale in a given price of goods and services in a period of time .
Alasana
Demand can refer to the ability and willingness to purchase a commodity at a giving price and time.
habib
what must the producer do if total costs exceed total revenue
Mmusi Reply
raise price
Nguyen
reduce cost
Charles
scarcity resources sample
nawala Reply
land
Charles
what's scarcity
tumelo Reply
resources short in supply
Charles
hello
Shadesch
scarcity is excess against human wants.
Kennedy
scarcity is limit in supply relating to demand
Akwosih
students
Hamdu
shortge of resources .imbalance of wants to resources .
Hamdu
hlo
Yahya
limitation of supply in relation to their demand for commodity
Prince
what are the two types of economic theory's?
Lizabeth Reply
i thick it is microeconomic theory and macroeconomic theory. or it can be normative and positive economic theories.
Deep
yes^
Nguyen
with diagrams show thé change in prices in thé different time period that can result in an increase in demande
Fankam Reply
define momentary period
Fankam
What is a monopsony?
Allan Reply
monopsony is a situation where only one buyer is available in the market
The
And with many sellers?
Allan
oligopsony
The
to be more specific, oligopsony is a situation with many sellers but few buyers
The
Thank you
Allan

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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