B Com Exam > B Com Notes > Macro Economics > Say’s Law of Market in Classical Theory of Employment - Macroeconomics
Say’s Law of Market in Classical Theory of Employment - Macroeconomics | Macro Economics - B Com PDF Download
1. Optimum Allocation of Resources:
There is optimum allocation of resources as they are allocated to different channels of production in terms of proportionality and equality of marginal products.
2. Perfect Equilibrium:
Commodity prices and factor prices are determined in perfect equilibrium of their demand and supply.
3. Perfect Competition:
There is perfect competition prevailing in the commodity market as well as factor market. Thus, commodity prices are equal to average costs and factor prices are equal to marginal productivities.
4. Market Economy:
There is free enterprise economy.
5. Laissez-Faire Policy of the Government:
There is no government intervention in the economic field. The government follows a laissez-faire policy to facilitate automatic adjustment and smooth working of the market mechanism in the capitalist economic system.
6. Elastic Market:
The size of the market has no limits. Thus, there is automatic expansion of the market with an increase in output offered for sale.
7. Market Automatism:
The free market economy and its working of price mechanism provide due scope to labour supply and the rising population also stimulates capital formation. In an expanding economy, new workers and firms will be automatically absorbed into the productivity channels by their own products in exchange without displacing or supplanting the existing firms and workers.
8. Circular Flow:
The circular flow of money is regular and continuous without any leakages. This implies that saving is nothing but another form of spending on capital goods. Savings are, thus, automatically invested.
There is absence of hoarding. Hence, there is no break in the flow of income and expenditure. Income is automatically spent through consumption expenditure and investment expenditure.
9. Savings-Investment Equality:
Since all savings are automatically invested, savings always equal investment. Savings-investment equality is the basic condition of equilibrium in the economy. It is maintained by interest flexibility.
10. Long-term:
The economy’s equilibrium process is perceived from the long-term point of view.
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FAQs on Say’s Law of Market in Classical Theory of Employment - Macroeconomics - Macro Economics - B Com
| 1. What is Say's Law of Market in the Classical Theory of Employment? |  |
Ans. Say's Law of Market, named after the French economist Jean-Baptiste Say, states that the production of goods and services creates its own demand. According to this theory, the income generated from the production of goods and services will be used to purchase other goods and services, ensuring that there is no general overproduction or unemployment in the economy.
| 2. How does Say's Law of Market relate to the Classical Theory of Employment? | |
Ans. Say's Law of Market is a fundamental concept in the Classical Theory of Employment. It forms the basis of the theory's argument that the economy will naturally tend towards full employment equilibrium. According to the classical economists, any temporary imbalances between supply and demand will be corrected through the self-adjusting mechanisms of the market, as the production of goods and services will create the necessary purchasing power to consume them.
| 3. What are the implications of Say's Law of Market on unemployment? | |
Ans. Say's Law of Market suggests that there will be no involuntary unemployment in the long run. According to the classical economists, if there is any unemployment, it is due to factors such as excessive government intervention, labor market rigidities, or other external disturbances. They believed that the market forces would naturally adjust to eliminate unemployment as the production of goods and services generates the income needed to create demand for those goods and services.
| 4. Is Say's Law of Market still relevant in modern economics? | |
Ans. Say's Law of Market has been subject to criticism and is not widely accepted in modern economics. Keynesian economists, for example, argue that there can be situations of general overproduction and demand deficiency, leading to persistent unemployment. They emphasize the role of aggregate demand and the need for government intervention to stimulate the economy during recessions. However, the concept of Say's Law still has its proponents who argue that it holds true in the long run.
| 5. How does Say's Law of Market impact government policies? | |
Ans. Say's Law of Market suggests that government intervention in the form of fiscal or monetary policies may not be necessary to correct unemployment or stimulate economic growth. According to the classical theory, the market mechanisms will naturally adjust to ensure full employment equilibrium. However, in modern economics, the role of government policies has gained prominence, particularly during economic downturns, as they are seen as tools to stabilize the economy and mitigate the impact of recessions.
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