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Chapter 24: Q. 1 (page 601)

Describe the mechanism by which supply creates its own demand.

Short Answer

Expert verified

Say's Law states that supply creates its own demand.

Step by step solution

01

Step 1. Definitions.

Aggregate supply can be defined as the total volume of output produced in a region in a given period. Aggregate demand can be defined as the total volume of spending in a region in a given period.

02

Step 2. Say's Law.

Say's Law states that supply creates its own demand. The supply of goods requires a combination of factors of production for the production of goods and services. These factors of production in return receive factor inputs such as wages, salaries, rent, interest, and profit. These factor inputs are income for the households and the income they receive will create demand for the goods. This phenomenon is based on the fact that one person's expenditure is another person's income.

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Most popular questions from this chapter

Will the shift of SRAS to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of SRAS to the left?

Are Say’s law and Keynes’ law necessarily mutually exclusive?

What is on the horizontal axis of the AD/AS diagram? What is on the vertical axis?

How is long-term growth illustrated in an AD/AS model?

Name some factors that could cause AD to shift, and say whether they would shift AD to the right or to the left.
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