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

Neoclassical view, Roles of government in controlling market forces under n...

Roles of government in controlling market forces under neoclassical view

Current macroeconomics problems, In order to encourage you to take interest...

In order to encourage you to take interests in the current affairs in business, and have more concerns about the real world problems (which is what economics is about), you are req

Price of dvd players decreases, If the price of DVD players decreases, we c...

If the price of DVD players decreases, we can expect that the demand for DVDs will: a. increase. b. be unaffected. c. shift left. d. Decrease

Subsidizing the price of milk, "Subsidizing the price of milk or other agri...

"Subsidizing the price of milk or other agricultural products is not very expensive considering how many consumers there are in the United States. Therefore, there is little harmfu

Determine what would be lowest bid of sfi , Snake Farm Inc. (SFI) has been ...

Snake Farm Inc. (SFI) has been offered to submit a competitive bid for building 31 and 22, 18, and 11offshore pits per year for Athletic Inc. over the next four years.  If the bid

Combination price of capital decreased, In reference to the above question,...

In reference to the above question, assume you know the combination of inputs that minimizes cost. What would happen to this input combination if the price of labor increased? What

Mec, Lucas’ point of view, what are the limitations of the Keynesian model?...

Lucas’ point of view, what are the limitations of the Keynesian model? What improvements does he suggest?

Explain the problem involved in consumer price index, Q. Explain the proble...

Q. Explain the problem involved in consumer price Index? To explain the problems involved in calculating CPI we consider MP3 players. If you measure the average price of MP3 pl

Price of beer to increase by 10 percent, A recent article estimated that th...

A recent article estimated that the elasticity of the rate of gonorrhea with respect to the price of beer is about 0.8. If this estimate is correct, are unprotected sex and beer su

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