How not to justify say''s law, Macroeconomics

Assignment Help:

At first, Say's Law may seem 'obvious'. Though, it's not - actually, it's highly controversial. The reason it may seem obvious is that you have perhaps learned from microeconomics that in equilibrium, demand is equal to supply. If you're outside equilibrium, prices will adjust and you shall be taken back to equilibrium. 

This isn't the motivation behind Say's Law which isn't an equilibrium condition. In the classical model, YS and YD are real variables which don't depend on the price level. This may strike you as odd. YS relies only directly on L and K and indirectly on the real wage. If price level increases in the classical model, wage level will increase by the same amount leaving the real wage unchanged. As for aggregate demand, if price level and wage level both increase (by the same amount), there is actually no change for the consumers. If all prices double whereas you income doubles, there is no need to adjust you demand.

The justification for Say's Law isn't as an equilibrium condition through price adjustments. No price adjustment in the world would equilibrate aggregate demand and aggregate supply in the classical model. In its place, justification is based on income effects instead of on price effects: higher supply Þ higher income Þ higher demand.

The reason why Say's law is so controversial is following. Assume that investors and consumers fear that the economy will slow down. They may then decide to save a substantial part of their income and aggregate demand may not be equal to aggregate supply.


Related Discussions:- How not to justify say''s law

Effect of real wage in classical labour market, illustrate the effects of a...

illustrate the effects of a reeal wage existing in the labour market if it is perfectly competitive

??, If the U.S. government were willing to convert dollars into gold at a f...

If the U.S. government were willing to convert dollars into gold at a fixed price, then dollars would be a. fiat money. b. commodity money. c. bank money. d. both fiat and

Objective of empirically analyses, The aim of this paper is to observe and ...

The aim of this paper is to observe and interpret the correlations between oil price changes, and changes to key macroeconomic indicators. From this we will be able to observe if t

Calculate the income elasticity and good , Due to the recent downturn in e...

Due to the recent downturn in economic activity, Taz, has seen his hours at work reduced. He used to work 30 hours a week at $13 and hour, but now he works 22 hours. Due to this

Classical labour market, using a classical labour market , illustrate the e...

using a classical labour market , illustrate the effects of a real wage existing in the market that is lower than the equilibrium real wage. what will eventually happen in this lab

Compute the equilibrium level as-ad model, 1 . Use the AS/AD model to a...

1 . Use the AS/AD model to a . Demonstrate graphically and explain verbally the situation the US economy is currently in. b. In the diagram you drew for part (a) above, sh

Help i don''t know how to use this wb, i wan''t the answer of this Q Questi...

i wan''t the answer of this Q Question 3 (5 marks) Most studies of firms’ long run costs have found that average costs decline as firms produce increasingly larger output levels (

Marginal abatement cost curve, A critically important criterion that must b...

A critically important criterion that must be considered in evaluating environmental policies is whether they provide strong incentives for people to find new ways to improve ambie

Demand, Demand: Demand is quantity of a good buyer who wishes to purcha...

Demand: Demand is quantity of a good buyer who wishes to purchase at each conceivable price. The law of demand explains us that if the price of certain commodity increases,

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd