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Say's Law Of Market

 Say's Law of Market

            Say’s law of market is the core of the classical theory of employment. There cannot be general overproduction and the problem of redundancy in the economy. Conversely, if there is general overproduction in the economy and then some labourers may be asked to leave their jobs there may be the problem of unemployment in the economy sometime.

In the long run the economy will automatically tend toward full employment. In Say’s words, “It is production which creates market for goods. A product is no sooner created then it, from that instant, affords a market for other products to the full extent of its own value. Nothing is more favourable to the demand of one product, than the supply of another.”

The significant facts of this definition are as follows:

  1. Production Creates Market Demand for Goods

    When producers obtain the various inputs to be used in the production process they generate the necessary income. For instance, producers give wages to labourers for producing goods. The labourers will purchase the goods from the market for their own use. This in turn causes the demand for goods produced. In this way, supply creates its own demand.

  1. Barter System as its Basis

    In its original form, the law is applicable to a barter economy where goods are ultimately sold for goods. Therefore, whatever is produced is ultimately consumed in the economy. In the other words, people produce goods for their own use to sustain their consumption levels.

    Say’s law, in a very broad way, is as Prof. Hansen has said “a description of a free exchange economy. So conceived it illuminates the truth that the main source of demand is the flow of factor income generated from the process of production itself. Thus the existence of money does not alter the basic low.

  1. General Over Production Impossible

    If the production process is continued under normal conditions, then there will be no difficulty for the producers to sell their products in the market. According to Say, work being unpleasant no person will work to make a product unless he wants to exchange it for some other product which he desires. Therefore, the very act of supplying goods implies a demand for them. In such a condition there cannot be general over production for the reason supply of goods will not exceed demand as a whole. But a particular good may be over produced for the reason that producer the producer incorrectly estimates the quantity of the product which others want. But this is a temporary phenomenon, for the excess production of a particular product can be corrected in time by reducing its producing.

  1. Saving Investment Equality

    Income accruing to the factor owners in the form of rent, wages and interest is not spent on consumption but some proportion out it is saved which is automatically invested for further production. Therefore, investment in production is a saving which helps to create demand for goods in the market. Further, saving – investment equality is maintained to avoid general over production.

  1. Rate of interest as a Determinant Factor

    Say’s Law of markets regards the rate of interest as a determinant factor in maintaining the equality between saving and investment. If there is any divergence between the two, the equality is maintained through the mechanism of the rate of interest. If at any given time investment exceeds saving, the rate of interest will rise. To maintain the equality saving will increase and investment will decline.

    This is due to the fact that saving is regarded as an increasing and investment will decline. This is due to the fact that saving is regarded as an increasing function of the interest rate and investment as a decreasing function of the rate of interest. Alternatively, when saving is more than investment the rate of interest falls, investment increasing and saving declines till the two are equal at the new interest rate.

  1. Labour Market

    Prof. Pigou formulated Say’s law in terms of labour market. By giving minimum wages to labourers according to Pigou, more labourers can be employed. In this way, there will be more demand for labour. As pointed out by Pigou, “with perfectly free competition, there will always be at work a strong tendency for wage rates to be so related to demand that everybody is employed.”

    Unemployment results from rigidity in the wage structure and interferences in the working of the free market economy. Direct interference comes in the form of minimum wage laws passed by the state. The trade unions may be demanding higher wages more facilities and reduction in working hours. In short it is only under free competition that the tendency of the economic system is to provide automatically full employment in the labour market.

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