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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

how does one analyze a market where both demand and supply shift
Reymark Reply
explain and justify the effect of the event to the demand and supply for direction then apply the elasticity concepts for extent , support with diagrams
samantha
objective of macro economic
saroj Reply
give the characteristics of good money?
Chok Reply
suppose that there is a positive aggregate demand shock. what graph most accurately show how this would affect the aggregate demand-aggregate supply model?
Shielyn Reply
ppf and ad/as
jax
PPF , AD/AS
Shubham
Every Work must be done properly based on its Feasibility Studies duly prepared.
Pundato
why is it desirable for a country to have a large gdp? give an example of something that would raise gdp and yet be undesirable
JAWAD
if there is advance technology in the fishing industry, how will this change in supply and demand
El Reply
yes
Shehazahd
increase Supply, since technology in fishing will increase the efficiency of fishing , higher productivity and thus lower per unit cost of production, which incentive producers to increase their supply. demand wise, not so sure. depends on what exactly is the advancement in tech.
samantha
Increase and advance technology have little to do with so-called biological fish such as GMO fish food, captive sea-pond seafood and pollution sea water. Its science pollution in the ocean against science "avengers" in real scenerio. Quantum-medical-science if existed can't bluff a gourmet or chef
Tan
how many types of natural rate of unemployment
Trina Reply
what is macro economic
muniira Reply
in the year 1933, Ragnar Frisch used the term macro
Ammu
factors that determine the country material standard ?
Serena Reply
population divide by gdp in currency analysis
Aniyikayekenny
what is the important of studying economics
Akurugu Reply
economics teaches you how to think not what think
umer
in order to know how our country operates and corporate with other countries based on the international marketing and to know how our economy is doing regarding incomes going in and out through exchange of goods and services,we have to study more about economics to gain more and better understanding
Betty
important studying economic is make a choice under the condition of scarcity
cafifo
why is it desirable for a country to have a large gdp? give an example of something that would raise gdp and yet be undesirable
JAWAD
High GDP is good as it serves as an indicator of strong economic performance which would affect confidence in an economy, and affect living standards of citizens in the economy.
samantha
Me believes in GNP as an indicator bcoz no country tries to export products and services successfully. No government agrees of inter-regional jurisdiction to save guard investments.
Tan
I do agree with u on this. As far as I am aware of, theorically, both GDP and GNP are indicators of economic growth. but GNP is technically more accurate.
samantha
is labour a intermediate good or final good
umer Reply
Labour is every productive humans and animals which may include interactive machines/devices. Management, bosses and workers are labour. Security services like fireman, army and police are labour. Labour I sees in variation could be intermediate good and final good. Don't forget housewives too.
Tan
What is model in economics?
Javid
A model is a graphical representation which shows the relationship between two variables, example, Production function modal, it shows the relationship between two variables or input which yields a certain level of output.
Kiikpoye
Economics model is both combine inter-relations of micro and macro. Its chicken and egg analogy of household to market to manufacture to transfers of money in due of goods/services. You can say banking and finance sectors regulate strength of exchange currencies.
Tan
what is economics
Mahamed Reply
Economic is science, which Studies human behaviour and who they are earn and spend
Ammu
economics is the science which shows how can use scare resources among society
umer
economic is a science which study human behavior as a result relationship between ends at scarce means which have more than one use
Jovert
simply, economics is a science which studies human wants,
Saeed
Economy is knowledge of choice
Omid
Economics main points is humanity productions of goods and services which supports international arrangements of foreign/local money and have long history of gold behaviour as currency growth/exchanges
Tan
how to derive the equation for the equilibrium level of national income in an open economy with no taxes
loise Reply
what is inflation?
Herry Reply
when price goes up with some shottime
umer
Give me 5 example for Macro economics
Neha Reply
1. Markets 2. Market Failure 3. Competition 4. Price Stability 5. Efficiency
Luyando
please can you explain markets and markets failure ?
Timothy
When we talk about Markets as an example of macroeconomics, we look at demand and supply in labor market.
Luyando
Then for market failures, we focus on market inefficiencies and failures such as the destruction of common goods due to economic systems that provide no incentive for their preservation
Luyando
Who is a discourage worker.?
Timothy
a discourage worker is simply a worker who stop looking for a job because he/she believe no job is available for them..
Joseph
sloping curve normal
Mirasol Reply
A normal sloping curve
Mirasol
State what happen to the aggregate supply curve for beef. The price of beef decrease
Mirasol
i think there is positive relationship between price n supply so as the price decreases the supply curve so decreases and vice versa
Dharani
quantity supply will decrease,less.profit for firms in a perfectly competitive market i guess
Joseph
yaa
Dharani

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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