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?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

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.

brubin2's profile pic

brubin2 | (Level 1) eNoter

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"Say’s Law is best known in the form Keynes postulated it in The General Theory: 'supply creates its own demand'". Despite the apparent eloquence and simplicity contained in this definition, it obscures the genuine meaning of the concept" (Watson).

Say's law states that production is the determinant of demand because the purchasing power of any economic agent (level of demand) is determined by that agent's productive power (level of supply).  If you produce $400 worth of hay (or any other good) every month, you will demand $400 worth of goods and services every month.  

It's important to note that Say's law is not true in the short run.  It's also important note that Say's law does not say that supply inherently creates it's own demand.  A person cannot just produce any good and assume it will turn into equal purchasing power.  Purchasing power is determined by the market value of that persons production, not the relative amount or any other measure.  

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