Say's Law of Market - Meaning, Assumption, Implication and Criticism

Summary

This video discusses the concept of the 'Sales of Market' as per the views of classical economics, focusing on the self-regulating nature of supply and demand. It covers topics such as how supply creates its own demand, the idea of perfect competition, and implications like achieving full employment and the role of automatic adjustment mechanisms in the economy. The script also critiques these ideas, highlighting potential deficiencies in effective demand, the limits of self-adjustment, and the need for government intervention to address market imbalances, particularly in the short run. Overall, it provides a thorough exploration of economic theory and its criticisms.

Takeaways

• 😀 The Law of Market suggests that supply creates its own demand, meaning whatever goods are produced will automatically generate demand.
• 😀 According to the Law of Market, production requires land, labor, and capital, and each factor is compensated through rent, wages, and interest, respectively.
• 😀 The Law of Market operates under the assumption of perfect competition in commodity and factor markets, where no government intervention is needed.
• 😀 Full employment is automatically achieved in the long run due to the self-adjustment mechanism of supply and demand.
• 😀 The Law of Market posits that supply generates income, and people with this income create demand for the products produced.
• 😀 According to the Law of Market, saving equals investment, and this automatic adjustment mechanism ensures economic stability.
• 😀 A key implication of the Law of Market is that there will be no deficiency of aggregate demand, as supply creates demand for whatever is produced.
• 😀 The Law of Market holds that the quantity of money does not affect production or employment, as money only serves as a medium of exchange.
• 😀 One criticism of the Law of Market is that it ignores the possibility of deficiencies in effective demand, especially in situations involving investment goods.
• 😀 Another criticism is the overemphasis on the long run, as the short-run dynamics of the economy, such as adjustments to aggregate demand and supply, are often overlooked.

Q & A

What is the basic idea behind the Sales of Market concept?

The concept of Sales of Market revolves around the theory that supply creates its own demand. According to this view, the goods produced will automatically generate demand, leading to a balance where overproduction does not occur.

What role do land, labor, and capital play in the creation of demand in the Sales of Market theory?

In the Sales of Market theory, land, labor, and capital are the factors of production. When these factors are employed to produce goods, they generate income. This income then creates demand for the products produced, thus linking supply to demand.

How does the theory view government intervention in the economy?

The theory suggests that there is no need for government intervention in the economy. It believes that the market operates on its own through self-adjustment, meaning demand and supply will naturally reach an equilibrium without external control.

What is the significance of perfect competition in the Sales of Market?

Perfect competition is a key aspect of the Sales of Market. It ensures that there is no monopoly, and all players in the market are treated equally, leading to efficient allocation of resources where supply creates its own demand.

What does 'Long Run' mean in the context of the Sales of Market theory?

In the long run, the theory suggests that all economic factors will adjust automatically. The market will reach an equilibrium where supply and demand balance out over time, ensuring full employment and stable prices.

What are the implications of the Sales of Market theory on employment?

The theory implies that full employment will be achieved in the long run because demand and supply naturally adjust to ensure that everyone who wants to work will find a job. There is no permanent unemployment.

How does the theory explain economic growth in terms of money supply?

According to the Sales of Market theory, money acts as a medium of exchange. Changes in the money supply, whether an increase or decrease, do not directly affect production or employment levels, as these are determined by factors like investment and demand.

What is the criticism regarding the assumption that savings equal investment?

One criticism of the Sales of Market theory is that it assumes savings always equal investment, which may not always be the case in real-world economies. In practice, savings may not always translate into productive investment, potentially leading to economic imbalances.

What are the criticisms regarding the self-adjustment mechanism?

The theory's self-adjustment mechanism is criticized for being overly optimistic. Critics argue that it may not work effectively in all cases, especially when there is insufficient aggregate demand or during economic crises where market forces fail to bring about quick recovery.

Why is government intervention considered necessary by some critics of the theory?

Some critics argue that government intervention is necessary to adjust demand and supply, particularly during periods of economic instability. They believe that government actions, such as fiscal and monetary policies, can help stabilize the economy and address deficiencies in demand.