Supply Creates Its Own Demand

Topics: Keynesian economics, Capitalism, Adam Smith Pages: 3 (857 words) Published: October 20, 2012
The classical economists accepted Say's Law of Markets, the doctrine of the French economist Jean Baptiste Say. Say's law holds that the danger of general unemployment or “glut” in a competitive economy is negligible because supply tends to create its own matching demand up to the limit of human labour and the natural resources available for production. Each enlargement of output adds to the wages and other incomes that constitute the funds needed to purchase added output. Classical economists had complete faith in markets. They believed that the economy would always settle - automatically - at the full employment equilibrium in the long-run. However, they did acknowledge that there might be a slightly different reaction in the short run as the economy adjusted to its new long-run equilibrium. Keynes provides the following formulation of Say's Law in Chapter Two of his General Theory: "The classical economists have taught that supply creates it own demand, meaning by this in some significant, but not clearly defined, sense that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product." Keynesian economics places central importance on demand, believing that on the macroeconomic level, the amount supplied is primarily determined by effective demand or aggregate demand, and Keynes summarized Say's law as "supply creates its own demand". For example, without sufficient demand for the products of labour, the availability of jobs will be low; without enough jobs, working people will receive inadequate income, implying insufficient demand for products 'Say's Law' had to an important extent replaced 'theorie de debouches' or 'law of markets' as the name for a particular set of economic principles that was part of the core foundation of classical economic thought. Two questions therefore...
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