SAYS LAW OF MARKETS / Supply Creates its own demand.

Introduction:
- According to classical theory, if there is equilibrium in wage rate (rate at which demand for labour and
supply of labour is equal), then there shall be full employment of labour in such markets.
- Hence, the total output produced will be at full employment level. This is called aggregate output at full
employment.
- But there is a question. Will the total demand (aggregate demand) be equal to total output (aggregate
output) at full employment?
- It is not possible that the aggregate demand will always be equal to aggregate output (supply).
- If aggregate demand is less than aggregate output (supply) then it is called deficiency of demand.
Similarly, if aggregate demand is more than the aggregate supply, then it is called surplus demand.

Says Law:
- Says law: Supply creates its own demand.
- This means that whatever output is produced in the economy, it will always be demanded by consumers.
Hence demand can never be less than supply.
- In other words, aggregate demand can never be less than aggregate supply.
- Hence, if demand is not less, there is no possibility of recession and unemployment.

Says Law in Barter Economy:

- In a barter system, a person receives goods in exchange of goods. There is no money involved.
- Hence, people work to produce goods for their own consumption or exchanging it with others.
- Hence, whatever goods is produced is either consumed or exchanged. Hence all goods produced is used.
- This proves Says law. Supply creates its own demand.

Says Law in Money Economy:

- In money economy, people receive money in exchange of goods. In other words, whatever goods is
produced, it is going to earn equal value of money. Thus, income earned = value of goods.
- The money income is spent by people on buying goods. Thus all money income is used in buying goods.
- This proves that whatever output is produced, it gets sold. Thus it proves that Says law is useful in
money economy also.

Assumptions of Says Law:

1. There is free market economy. This means that government does not interfere in the market.
2. Government does not interfere in the market. Hence, there is no tax, subsidy or public expenditure in
market.
3. People produce goods either for self-consumption or purchasing other goods with it.
4. No person holds cash balance because money is just a medium of exchange.
5. Total savings is always equal to total investment.
6. It is a closed economy. It means a country does not have any trade relations with other countries.

CRITICISM:

1. There is a free market assumption in this theory. But, this is not always true.
2. There is an assumption that Government does not interfere in market. But, we know that government do
interfere by taxes, subsidies, expenditures etc.
3. It is wrong to assume that total savings is always equal to total investment. Keynes proved that some part
of the savings may not be used for investment.
4. It is assumed that there is a closed economy. This is not true always because countries do have trade
relations with other countries.
5. There is an assumption that no person holds cash balance because money is just a medium of exchange.
This is not always true. Some people hold cash balance also.
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