Tuesday, June 14, 2011

What is the rationale behind Say's Law?and how can there never be a general overproduction or underproduction of goods in the economy due to this law?

Say's Law states that supply creates its own demand.  This is the basis of supply side economics.


The rationale here is this.  Let's say that you have a factory and you are producing goods.  That means you are creating a supply of those goods.  Assuming you are paying your workers a fair market wage, they are going to have enough money to buy goods.  It may not exactly be your goods that they purchase, but you are making them able to buy goods.


So that is why there should never be overproduction -- everytime you produce, you are giving people money and they will use it to buy.  By the same token, you can't underproduce because if you don't produce much, there won't be that much money paid out and there will not be shortages of goods.


Say thought his law applied in the short and long terms. 
Even most supply side economists today believe it only works in the long term.

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