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Say’s law of market is the cornerstone of classical thoughts. It is the edifice
on which entire classical theory is based on. The Say’s law of market
provided the basic premise underlying the macroeconomic framework of
classical theory. The fundamental conclusion of classical economists is that
the economy will achieve its full employment eqm automatically by the free
flow of market forces without state intervention. Full employment is a state
of the economy characterised by absence of a situation of over production
or deficient demand, which is the essence of Say’s Law of market.
Propounded by the French Economist J.B. Say, the law states that “supply
creates its own demand.” hence Aggregate demand in the economy is equal
to aggregate supply. There is no over production or deficient demand
implying, the economy is always in the state of full employment equilibrium.
BASIC ARGUMENTS OF SAY’S LAW OF MARKET
The law asserts that every producer supplies his goods in the market in order
to get other goods in exchange for them. Whenever a producer produces
goods, he pays remuneration to the factors of production in the form of
wages, interest, rent and profit. These payments constitute income of the
factors. Thus, in the very act of supply of a commodity income of the factors is
also generated. This income is used to demand the goods produced. In other
words, the money costs of goods are paid out as income to the people and all
incomes are spent to buy the goods produced. Whenever the volume of
production is to be increased, the idle factors of production are put to work
and the production of goods so increased is distributed among the newly
employed factors as incomes or rewards for the work done.
In this way, with increased supply, idle factors of production also get purchasing power that
they spend on goods and services produced. Thus, by providing purchasing power to the
factors of production every supply generates its own demand. According to Say, increase or
decrease in supply brings about a proportionate increase or decrease in the purchasing
power of the households and equi-proportionate increase or decrease in the AD in the
economy. Level of demand, thus, always matches the level of supply
- A person will produce a commodity for two purposes either he will consume it himself,
or he will exchange it for other commodities. In this way, as much a person supplies so
much he demands. Supply & demand are, therefore always equal. E.g: You manufacture
a motor car. You pay to different factors of production, who helped in the production of
the car, remuneration for their services in the form of rent, wages, interest and profit,
the AD whereof is equal to the value of the car. Supply of car, therfore, becomes the
cause that give rise to its demand.
- In fact, Say’s law is a summary phrase for the belief that in the long run there is a
tendency towards equality of AS & AD and therefore, a general over-production or over
supply is not possible.
 ASSUMPTIONS

(1) Perfectly Competitive Economy: The law assumes perfect competition in

all markets. Under perfect competition, if the demand and supply of
factors and commodities are not equal then their prices will change in
such a manner that their demand will be equal to their supply.
(2) Flexible Prices: The law also assumes that prices, wage rate and rate of
interest are perfectly flexible. If demand is less than supply, the price must
fall; consequently, demand will rise to become equal to supply. If there is
unemployment in the country, the wage-rate will fall and as a result, level
of employment will increase. If there is no equilibrium b/w saving and
investment, the rate of interest will change in such a way so as to equalize
the two.
(3) Money- A Veil: Another assumption of the law is that money is only a
medium of exchange. In fact, goods are exchanged for goods. The function
of money is just to facilitate this exchange of goods. In other words, money
is a veil. It has no effect of its own on economic activities.
(4) No Hoarding: The law further assumes that people spend all the money
that they get, i.e, nothing is hoarded. All income is spend either on
consumption or capital goods. Thus, saving is always to investment.
(5) State is Neutral: It is also assumed that state does not interfere with
the activities of the economy, in any manner. Forces of demand and supply
will bring about eqm in the economy. In other words, there is automatic
adjustment of the economic parameters through the operation of price
mechanism.
(6) Unlimited Opportunities for Labour and Capital: Supply of labour and capital
in the economy is perfectly elastic. In other words, supply of labour and capital
can be increased to any extent and in any proportion in an enterprise. This
implies perfect factor substitutability.
(7) The Large Extent of the Market: The law assumes wide extent of the market.
As the volume of goods goes on increasing, the size of the market will go on
extending.
(8) Long Period: Say’s law of market holds good in the long period alone. In the
short period, due to several causes general over production and partial
unemployment may be possible. But, in the long run, economic forces will work
in such a way so as to help restore full employment.
(9) Production acc. To Consumer’s Preference: It is also assumed that goods are
produced acc. To the likings of the consumers. Hence, the amount of the goods
produced is purchased fully.