Chapter 24: Problem 19

Does Say's law apply more accurately in the long run or the short run? What about Keynes' law?

Short Answer

Expert verified

Say's Law is more accurate in the long run, as all factors of production are adjustable, allowing for market equilibrium. On the other hand, Keynes' Law is more applicable in the short run, as shifts in demand can lead to changes in economic activity and production levels. In the long run, the economy can reach equilibrium, making Say's Law relevant, while the short run is characterized by temporary imbalances and the importance of demand in driving supply.

Step by step solution

Define Say's Law and Keynes' Law

Say's Law states that supply creates its own demand, meaning that the production of goods and services generates enough income for the purchase of goods and services in an economy. On the other hand, Keynes' Law states that demand determines supply, meaning that the purchasing power of households and firms drives economic activity and production.

Differentiating Short Run and Long Run

The short run refers to a period when at least one factor of production is fixed, such as physical capital. In this timeframe, a change in demand or supply can lead to temporary imbalances in the market. The long run is a period when all factors of production are variable, and businesses can adjust their production levels. In the long run, the economy can achieve equilibrium, where supply matches demand.

Say's Law in Short Run and Long Run

In the short run, Say's Law might not apply accurately because temporary imbalances in supply and demand can occur, leading to either excess supply or excess demand. The market might not be able to adjust instantly to address these imbalances. However, in the long run, Say's Law tends to be more accurate as all factors of production are adjustable, allowing for market equilibrium. Producers can change their production levels, and consumers can alter their consumption patterns, resulting in a balance between supply and demand.

Keynes' Law in Short Run and Long Run

Keynes' Law is generally more applicable in the short run, as shifts in demand can lead to changes in economic activity and production levels. For example, during a period of low consumer demand, businesses might reduce their production levels due to decreased purchasing power of consumers, leading to a decline in overall economic activity. In the long run, Keynes' Law might not apply as accurately, with the economy more likely to reach equilibrium. Adjustments in production levels, consumption patterns, and prices can help address imbalances between supply and demand, reducing the role of demand as the primary determinant of economic activity.

Conclusion

To sum up, Say's Law applies more accurately in the long run, while Keynes' Law is more applicable in the short run. In the long run, the economy can adjust and reach market equilibrium, making Say's Law more relevant, while the short run is characterized by temporary imbalances and the importance of demand in driving supply, as stated by Keynes' Law.