Says Law Of Market

>Introduction

The classical school of economic thought, comprising eminent economists such as Adam Smith,
David Ricardo, and John Stuart Mill, laid the foundation for economic theory during the 18th
and 19th centuries. Rooted in traditional and orthodox principles, the philosophies of the
classical economists were characterized by well-defined and systematic thoughts.

A pivotal figure shaping the classical economists' belief in full employment equilibrium was the
French economist Jean-Baptiste Say (1767-1832). Say's influential contribution to economic
thought was encapsulated in Say's Law, which posited that "Supply creates its own demand."
This principle suggested that the act of production automatically generates the income
necessary to create demand for goods and services. Therefore, in the classical perspective, any
deviations from full employment were seen as temporary and self-correcting, with a natural
tendency for the economy to return to a state of full employment.

>Assumptions

Existence of Full Employment:

The assumption that there will be full employment in the economy forms a foundational
premise. This implies that all available resources, especially labor, are utilized efficiently, and
there is no involuntary unemployment. This assumption aligns with the classical economic
perspective, where deviations from full employment are considered abnormal and temporary.

Free Market Price System:

The model assumes the operation of a free market price system. Prices are determined by the
forces of supply and demand without significant interference from the government or other
external entities. This assumption reflects a belief in the efficiency of market mechanisms in
allocating resources.

Perfect Competition in Labor and Product Markets:

Perfect competition is assumed in both labor and product markets. This entails a large number
of buyers and sellers, homogenous products, perfect information, and ease of entry and exit.
Under perfect competition, no individual firm or worker has the power to influence prices or
wages, ensuring that the market operates with maximum efficiency.

Closed Laissez-Faire Economy:

The assumption of a closed laissez-faire economy implies minimal government intervention. In

such an economy, government involvement is limited to enforcing property rights and ensuring
the functioning of the legal framework. The market is expected to operate without substantial
interference from regulatory or interventionist policies.

Flexible Wages and Prices:

The assumption of wage and price flexibility is crucial. Wages and prices are expected to adjust
freely based on changes in supply and demand conditions. This flexibility ensures that markets
can quickly clear, responding to changes in economic conditions without persistent imbalances.

Coordination between Money Wages and Real Wages:

The model assumes coordination between money wages (nominal wages) and real wages
(adjusted for inflation). This coordination ensures that changes in money wages accurately
reflect changes in purchasing power, contributing to stability in the labor market and overall
economic equilibrium.

No Deficiency of Demand:

The assumption rejects the idea of deficiency in aggregate demand, implying that the economy
operates at its full potential with no periods of prolonged underutilization of resources. This
aligns with the classical view that markets naturally tend toward equilibrium.

Total Output Division:

The total output of the economy is assumed to be divided between capital, labor, and other
factors of production. This implies a balanced distribution of income and resources among these
factors.

Given Capital, Stock, and Technology in the Short Period:

The assumption that capital, stock, and technology are given in the short period implies a static
model where these factors do not change during the analysis.

>Meaning

Say's Law of Markets, formulated by the French economist Jean-Baptiste Say, is a foundational
concept in classical economics. It is often summarized by the statement "Supply creates its own
demand." Understanding the in-depth meaning of Say's Law involves exploring its key
components and implications:

Production and Consumption Relationship:

At its core, Say's Law emphasizes the fundamental relationship between production and
consumption in an economy. It posits that the act of producing goods and services
automatically generates the income needed to purchase those goods and services.

Supply and Demand Equilibrium:

Say's Law challenges the notion of a general glut or persistent overproduction in an economy. It
suggests that, in a well-functioning market, the supply of goods and services will naturally
create the demand for those goods and services. As individuals engage in production, they earn
income, and this income, in turn, becomes the basis for their demand for other goods.

Dual Nature of Economic Transactions:

Say emphasized the dual nature of economic transactions. When someone produces a good or
service and offers it for sale, they are not just supplying that product; they are also demanding
money or other goods and services in return. In this way, every sale constitutes both supply and
demand.

Rejection of General Glut:

One of the key aspects of Say's Law is its rejection of the possibility of a general glut, where
there is an excess supply of goods in the economy relative to demand. Say argued that if
individuals are producing goods and services, they will earn income, and this income will be
spent on other goods and services, ensuring that supply is matched by an equivalent demand.

Role of Entrepreneurship:

Entrepreneurship plays a crucial role in Say's Law. Entrepreneurs, by organizing and undertaking
production, contribute to the generation of incomes that, in turn, contribute to demand. The
process of innovation and entrepreneurship becomes a driving force in the economy, leading to
economic growth and development.

Implications for Economic Policies:

Say's Law has implications for economic policies. It suggests that policies focused on promoting
production, investment, and entrepreneurship will naturally lead to increased demand. In
contrast, policies that interfere with market mechanisms or hinder production could disrupt the
balance between supply and demand.

>Criticisms

Savings-Investment Mismatch:

The idea that "supply creates its own demand" is criticized for overlooking the possibility that
not all savings automatically lead to productive investments, creating a gap between savings
and investment and causing deficient demand.

Beyond Interest Rates for Investments:

Critics challenge the classical notion that investments are solely determined by interest rates.
Factors like future profit expectations and economic uncertainties play a crucial role, making the
assumption that all savings convert into productive investments unrealistic.

Possibility of Deficient Demand:

Contrary to the classical assertion, critics argue that deficient aggregate demand can occur due
to various real-world factors, such as changes in consumer confidence, income inequality, and
financial market instability.

Labor Market Adjustment Challenges:

The assumption that the supply of labor automatically adjusts to its demand is contested.
Unemployment persists due to factors like skills mismatch, geographical disparities, and
institutional rigidities, challenging the idea of smooth labor market adjustment.

Real-World Wage Flexibility Issues:

Say's argument for flexible wages is criticized for not aligning with real-world scenarios where
wages may not be as flexible due to institutional factors, minimum wage laws, and worker
bargaining power, contributing to persistent unemployment.

>Conclusion

In conclusion, while Say's Law of Markets has historical significance in classical economic
thought, it has faced substantial criticisms. The assumption that "supply creates its own
demand" is challenged by the real-world complexities of savings, investment dynamics, and the
possibility of deficient aggregate demand. Additionally, the belief in automatic adjustments in
labor markets and the rigidities of wage flexibility have been found inconsistent with observed
economic realities. These criticisms highlight the limitations of applying Say's Law in its original
form to complex, dynamic economies and underscore the need for a more nuanced
understanding of market dynamics and the factors influencing supply and demand interactions.

Keynes Psychological Law of Consumption

>Introduction

The Keynesian Psychological Law of Consumption, introduced by the renowned economist John
Maynard Keynes, is a fundamental concept in Keynesian economics. Unlike classical economists
who believed in the neutrality of money and the stability of individual expectations, Keynes
emphasized the role of psychological factors in influencing consumption behavior. The law
asserts that individuals' decisions about consumption are not solely driven by their current
income but are also significantly influenced by subjective factors such as expectations,
confidence, and attitudes towards future income. Keynesian economics, emerging in the
aftermath of the Great Depression, sought to explain and address the challenges of
unemployment and economic downturns, and the Psychological Law of Consumption played a
pivotal role in shaping Keynes's macroeconomic theories. This psychological perspective
underscores the importance of understanding the human element in economic decision-making
and provides insights into the dynamics of consumption patterns in the face of uncertainty and
changing economic conditions.

>THE LAW

The Keynesian Psychological Law of Consumption posits that individuals' decisions regarding
consumption are not solely determined by their present income but are significantly influenced
by subjective psychological factors, including expectations, confidence, and attitudes toward
future income. This emphasizes the importance of understanding human psychology in
analyzing consumption patterns and contrasts with classical economic assumptions that focus
on a direct and rational relationship between current income and consumption decisions.

>Explanation
The Keynesian Consumer function is

c=a +byd

C=consumer expenditure , y = real disposable income . a & b are constants

According to this law, consumption is not solely determined by current income but is
significantly influenced by individuals' subjective expectations and confidence in future income.
Keynes argued that people consider their long-term economic prospects, uncertainties, and
confidence in making consumption decisions. In times of economic uncertainty or downturns,
individuals may become more cautious, leading to a reduction in consumption, even if their
current income remains stable.

This psychological perspective has profound implications for economic theory and policy. It
challenges the classical notion of a direct and linear relationship between income and
consumption, suggesting that economic agents do not consistently spend every additional unit
of income they receive. Instead, their consumption behavior is influenced by perceptions of
future income and overall economic conditions. In practical terms, this means that traditional
fiscal and monetary policies, which focus solely on boosting income or reducing interest rates,
may have limitations in stimulating consumption if individuals are not confident about the
future. Policymakers need to consider the psychological aspects of consumer behavior to design
effective measures that address uncertainties and restore confidence, particularly in times of
economic distress.

Moreover, the Keynesian Psychological Law of Consumption underscores the importance of

expectations and confidence in driving economic cycles. Positive expectations and confidence
can lead to increased consumption and economic growth, while negative sentiments can result
in reduced spending and economic downturns. As such, policies that aim to stabilize the
economy need to address not only immediate economic conditions but also the psychological
factors shaping individuals' perceptions of the future. In essence, the law highlights the dynamic
and subjective nature of consumption decisions, contributing to a more comprehensive
understanding of economic behavior and the intricacies of demand management.

>Conclusion

In conclusion, the Keynesian Psychological Law of Consumption offers a critical insight into the
complexities of individual decision-making in the economic realm. By recognizing the influence
of psychological factors, particularly expectations and confidence, on consumption behavior,
this theory challenges simplistic views of the income-consumption relationship. The
implications of the theory extend to economic policy, emphasizing the need for measures that
not only address immediate economic conditions but also consider the psychological aspects
influencing consumer confidence. As a key component of Keynesian economics, this law
highlights the dynamic and subjective nature of economic decisions, providing a more holistic
understanding of the forces at play in shaping consumption patterns and overall economic
fluctuations.

BUSINESS OR TRADE CYCLE

>Introduction
The trade cycle, also known as the economic or business cycle, is a fundamental concept in
economics that describes the periodic fluctuations in economic activities such as production,
employment, and investment within an economy. These cycles are characterized by phases of
expansion, peak, contraction, and trough, creating a recurring pattern of growth and decline.
The study of trade cycles plays a crucial role in understanding the dynamics of economic
fluctuations and the impacts on various sectors and stakeholders. Economists analyze the trade
cycle to identify the underlying causes, anticipate trends, and formulate policies to manage and
mitigate the effects of economic ups and downs. As an inherent feature of market economies,
the trade cycle is influenced by a combination of factors, including consumer behavior,
technological advancements, monetary policies, and global economic conditions.
Understanding the trade cycle is essential for policymakers, businesses, and individuals alike, as
it provides insights into the cyclical nature of economic activity and informs strategies for
navigating different phases of the economic cycle.

>Meaning

The trade cycle, also known as the economic or business cycle, refers to the recurring pattern of
fluctuations in economic activity that occurs over time. It encompasses the cyclical movements
of key economic indicators such as gross domestic product (GDP), employment rates, and
investment levels

The trade cycle,, is characterized by distinct phases that reflect the cyclical nature of economic
activity. These phases include expansion, peak, recession, trough, and recovery.

Expansion Phase:

The trade cycle initiates with an expansion phase, marked by robust economic growth. During
this period, businesses thrive, production levels increase, employment opportunities expand,
and consumer spending rises. Positive economic indicators, such as rising GDP and low
unemployment rates, are indicative of the expansion phase.

Peak:

The peak follows the expansion phase and signifies the zenith of economic activity. At this point,
production and employment levels reach their peak, and consumer and business confidence are
generally high. However, the economy is operating at or near full capacity, and signs of potential
imbalances may emerge.

Recession:

The peak is succeeded by a recession, a phase characterized by a contraction in economic

activity. During a recession, business investments decline, consumer spending contracts, and
production levels decrease. Unemployment rates often rise as businesses adjust to the changing
economic landscape. The recession phase reflects a period of economic retrenchment and
adjustment.
Trough:

The trough represents the lowest point in the trade cycle and marks the end of the recession
phase. Economic indicators reach their nadir during this period, and the economy is at its
weakest. While the trough signifies a challenging economic environment, it also sets the stage
for the next phase of recovery.

Recovery:

Following the trough, the economy enters a recovery phase. During this period, economic
indicators begin to improve, and the economy gradually rebounds. Business investments
increase, consumer spending picks up, and production levels rise. Unemployment rates may
start to decline as economic conditions stabilize. The recovery phase is a period of renewed
optimism and rebuilding after the challenges of the recession.

Methods to Control Trade Cycle

Monetary Policy Adjustments:

Central banks use interest rate changes to manage economic cycles, raising rates in expansions
to control inflation and lowering them in recessions to stimulate economic activity.

Fiscal Policy Interventions:

Governments employ fiscal tools, like tax cuts or increased spending during contractions to
boost demand, and implement tax hikes or reduced spending in expansions to prevent
overheating.

Counter-Cyclical Measures:

Policymakers enact measures opposite to prevailing economic conditions, such as increasing

public spending or cutting taxes during downturns to stimulate the economy.

Prudential Regulations:

Stricter regulations in the financial sector, including enhanced oversight and increased capital
requirements, can prevent excessive risk-taking and contribute to financial stability.

Automatic Stabilizers:

Built-in mechanisms like progressive taxation and unemployment benefits automatically adjust
during economic downturns, providing a buffer against declining incomes and supporting
demand.

International Cooperation:

Collaborative efforts on an international scale address economic imbalances, currency

fluctuations, and trade issues, minimizing the transmission of economic shocks across borders.

Regulatory Reforms:

Implementing transparent regulatory reforms in finance, labor markets, and competition can
reduce systemic risks and address structural issues, contributing to a more stable economic
environment.

FOR NOTES ON KEYNESIAN LAW OF EMPLYMENT ASK ATHUL FOR HIS HANDWRITTEN
NOTES!!!!!!