Say’s Law of Market
Say’s law is the foundation of classical theory of employment. Say’s
law, named after the French Economist J.B. Say, is a classical economic
proposition that the production of aggregated output creates sufficient
aggregate demand to purchase all of the output produced. In other words, Say’s
law states that supply creates its own demand and over production is
impossible. In Say’s words, “It is production which creates market for goods
for selling each at the same time buying and more of production, more of
creating demand for other goods”. Every producer finds a buyer. Every supply of
output creates equivalent demand for output so that there can never be a
problem of general over production. Thus, Say’s law denies the possibility of
deficiency of aggregate demand.
Assumptions of Say’s Law
a) Free Market Economy
b) No government intervention
c) Flexibility in internal prices
d) Long run phenomenon
Classical theory of Employment
The classical theory of employment was developed by the combined
contribution of classical economist like Adam Smith, J. B Say, J. S. Mill,
David Ricardo etc.
The theory is based on the assumption of full employment of labour and
other resources of the economy. Full employment refers the situation when all
the people who are willing to work at the existing wage rate will get work.
Thus, full employment doesn’t mean achieving zero unemployment. Zero
unemployment is impossible in any real economy.
Assumption of classical theory of employment
a) This theory assumed that closed capitalist
economy.
b) Full employment level
c) Money acts as medium of exchange
d) There is the existence of perfect competition
in the market
e) There is existence of wage price flexibility
- Say’s law of market:
Same as before (not assumption)
- Money market:
Irving Fisher states that total value of
output is equal to total expenditure on final goods and services. According to
Fisher the long run rate of goods and services remains constant at full
employment level. Similarly, (V and V) velocity of money and velocity of bank
money also remains constant. Thus, price level (p) is determined by the supply
of money (M and M). There is direct relationship between money supply and price
level. Hence, PT = MV + MV
- Labour market:
Flexibility in wage rate assures labour
equilibrium with full employment. Real wage rate is determined by market forces
i.e. demand and supply of labour market. Demand for labour is negative function
of real wage rate whereas supply of
labour is positive function of real wage rate. Real wage rate is determined and
the level where demand and supply of labour are equal. This level also
represents level of full employment.
- Product market (Production
function):
According to classical economist total output
is decreasing function of the number of workers employed. It is due to the
operation of law of diminishing returns but at the full employment level of
output remains stable.
The classical theory of employment can be shown
with the help of following figures: 
In figure A, DD represents demand for labour curve and SS represents
supply. It intersect at point E i.e. equilibrium.
In figure B, y = f
curve indicates total
production function. It slopes upward to the right and bends to the x-axis and
after a point it becomes horizontal.
curve indicates total
production function. It slopes upward to the right and bends to the x-axis and
after a point it becomes horizontal.
In figure C, two horizontal curve representing MV and M1V1
at corresponding level of price. It slopes downward to the x-axis.
Thus, it indicates that total output increases at a decreasing rate
initially and reaches at its maximum and constant at full employment ON. At
full employment level, corresponding output is OY.
