Answer to Question #256873 in Macroeconomics for Veenika

Question

How Say's Law of Market explains the market mechanism? Is Say's Law of Market relevant in 21st century? If yes, how? If no, why?

Answer 1

Say’s Law of Markets is an assumption from classical economics which argues that the ability to purchase a commodity rely on the ability to produce and thus generate income. The theory explains that a buyer must produce a commodity to sell first, in order to have the means to buy. It suggests that production is the lead to economic growth and success and policy makers or the government should encourage production instead of promoting consumption.

Say’s Law of Market is not applicable in the 21st century. This is because supply does not create its own demand in the market. The law assumes that production creates its own market for commodities. This is not the case in the modern economy because demand does not increase as much when production increases. Demand creates its own supply but supply does not create its own demand. Also, there is no possibility of consumers to only consume those goods that are produced within the economy.