Say’s Law of Market is a fundamental principle of classical economics, propounded by the French economist J.B. Say. It states that “supply creates its own demand.” According to this law, production generates income sufficient to purchase the entire output produced, and therefore, general overproduction or deficiency of demand is not possible in the economy.
The law implies that whenever goods are produced, an equivalent amount of income is generated in the form of wages, rent, interest, and profit. This income is then used to purchase goods and services. Thus, there is always a balance between supply and demand in the economy.
According to Say’s Law, production is the source of demand. When goods are produced, they generate income equal to their value. This income is distributed among factors of production, and these factor incomes are spent on purchasing goods and services.
Thus, the act of supply creates demand automatically. There can be no general glut or overproduction in the economy because whatever is produced will be sold.
Savings do not lead to deficiency of demand because they are automatically converted into investment through changes in the rate of interest. Therefore, savings always equal investment.
Any temporary imbalance in the economy is corrected through price and wage adjustments. Flexible prices ensure that markets clear and equilibrium is maintained.
Full employment equilibrium as per Say’s Law
Say’s Law provides a foundation for classical economics by emphasizing the role of supply in generating demand. However, it has been widely criticized for its unrealistic assumptions and inability to explain real-world problems like unemployment and economic depression. Keynes rejected this law and introduced a demand-based approach to income and employment determination.