Page 43 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes
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Caution Assumptions of Say's Law
Say's law is based upon the following assumptions:

The amount of labour and capital can be raised in a free enterprise system based on
price mechanism.
In an expanding economy new firms and labourers can have easy entry by offering
their products in exchange without dislocating the position of existing firms and
labourers.
The size of market is capable of expansion.

All savings are automatically invested, i.e., savings always equals investment.
The Government does not interfere in the functioning of the economy.

Implications of Say's Law

Since there is automatic adjustment between production and consumption, there is no
need for the government to interfere in the functioning of economic system. Any
interference by the government in the automatic functioning of the economic system will
simply create imbalances and disequilibria.
When the unemployed resources are employed, they lead to more production which
covers their own costs. Hence, the economy will operate at the level of full employment.

The mechanism of interest flexibility brings about an equality between savings and
investment.
The mechanism of wage- flexibility brings about full employment.

Task Prepare a brief profile of economist Jean Baptiste Say.

3.1.2 The Basic Features of the Classical System

There are three basic features. First, the classical model is called full employment model. Second,
the labour, product and capital markets are interrelated markets. Third, there is simultaneous
equilibrium in all the markets.

Why called a Full Employment Model

It is called "full employment model" because the classical economists believed that free market
forces of demand and supply lead to full employment of resources through automatic adjustments
in overall price level (output market), wage rates (labour market) and interest rate (capital
market). The entire economy is in full employment equilibrium because all markets are
interrelated and what happens in one market will have impact in other markets.

The interrelation between Markets

The interrelation is depicted through the "circular flow of income" diagram.

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