Say's Law of Market

Introduction

It is core of the classical theory of employment. Say's law of market is named after Jean Baptiste Say which states that supply creates its own demand. This law states that aggregate output produces aggregate demand of same level and argues that prices and wages are flexible maintaining an equilibrium state in self-regulating economy.

Assumptions:

a)    

Wage and price are flexible in labor and goods market.

b)     There is perfect competition in those markets.

c)     There exists full employment in the economy.

d)     Money is only medium of exchange.

e)     Capital stock and technology of production are given.

f)       Total output of the economy is divided into consumption and saving.

g)     It assumes long run.

h)     There existence of full employment without inflation.

i)       There is laissez-faire capitalist economy.

Say's Law in a Barter Economy

Say's law was first explained in barter economy and operates logically for barter economy. In barter economy, goods are produced for either self-consumption or direct exchange to get some other goods. To supply one good in barter economy is necessarily to demand another. Hence, every seller is a buyer.

Say's Law in a Money Economy

This law remains valid even in the money economy because classical economists view money only as the medium of exchange with no active role in influencing the real sector of the economy. In money economy, the purchase and sales of good is made possible only by money.