Say’s law of market

Say’s law is commonly summarized as ‘supply creates its own demand.’ This law, also
referred to as Say’s ‘theory of markets’ or ‘law of markets,’ indicates that the act of
producing aggregate output generates enough aggregate income to purchase all of the
output produced.
This principle indicated that excess production or insufficient demand for production was
unlikely to occur, at least for any extended period. When combined with flexible prices and
saving investment equality, Say’s law further implied that an economy would achieve and
maintain full employment of resources.
This law was singled out by John Maynard Keynes in his critique of classical economics, but
remains relevant in current macroeconomic analysis, reflected in the circular flow model.
Say’s law that ‘supply creates its own demand’ is one of the fundamental principles of
classical economics.
When applied to the macro economy, Say’s law indicates that economic downturns cannot
be caused by the lack of demand, that is, overproduction. The aggregate production of
output generates just enough income to equate aggregate demand with aggregate supply.
Let us explain in detail.
Without question, the one thing for which Say is best known is ‘Say’s Law,’ also referred to
as his theory of markets (la theorie des debouches) or law of markets (loi des debouches).
This principle was, and still is, one of the key building blocks of the classical school of
economics.
Say identifies two means by which the corrective process operates.
Principally, he argues that, though individuals do save part of the income derived from
production, as long as those savings are reinvested in ‘productive employment,’ in the
aggregate there need be no decreases in production, income, or consumption. This process
of reinvestment is fuelled by differences in the profits earned by entrepreneurs.
Those goods that are relatively more scarce, and thus rising in price, attract additional
investment, while those that are relatively less scarce, and thus falling in price, discourage
investment. And even if one hoards money or buries it, ‘the ultimate object is always to
employ it in a purchase of some kind,’ so there still cannot be deficient demand as long as
real economic values are being produced. In order for consumers to exist, there must first
be producers.