4.1] Say’s Law Of Market

Say’s law of market, or the law of markets, is a principle in economics that states that the production of goods and services creates an equal amount of demand for those goods and services. In other words, supply creates its own demand.

The law is named after Jean-Baptiste Say, a French economist who first articulated it in the early 19th century. Say argued that the act of producing goods and services generates income for the producer, which can then be used to purchase other goods and services. This creates a self-sustaining cycle of production, income, and consumption that drives economic activity.

For example, if a farmer produces 100 bushels of wheat, he earns income from the sale of that wheat. This income can then be used to purchase other goods and services, such as clothing, tools, or entertainment. In this way, the farmer’s production of wheat has created demand for other goods and services.

Say’s law has been the subject of much debate among economists. Some economists argue that the law is always true, while others argue that it only holds true under certain conditions. For example, Say’s law may not hold true if there are disruptions in the flow of income or if there are changes in consumer preferences.

Despite the debate, Say’s law remains an important concept in economics. The law helps to explain how production and consumption are linked together in a market economy. It also helps to explain why economic growth is typically associated with increases in both production and consumption.

In addition to its implications for economic growth, Say’s law also has implications for government policy. For example, if Say’s law is true, then government policies that stimulate production are likely to also stimulate consumption. Conversely, government policies that discourage production are likely to also discourage consumption.

Overall, Say’s law is a fundamental principle of economics that helps to explain how production and consumption are linked together in a market economy.

4.2] Keynesian Employment Theory

Keynesian employment theory is based on the idea that the level of employment is determined by the level of aggregate demand. Aggregate demand is the total amount of spending in the economy, including spending by consumers, businesses, the government, and foreigners.

Keynes argued that the level of aggregate demand can be insufficient to maintain full employment. This can happen for a number of reasons, such as a decline in consumer confidence, a fall in investment, or a decrease in government spending. When aggregate demand is insufficient, businesses will produce less and lay off workers. This leads to a decline in income, which further reduces aggregate demand. This can create a vicious cycle of declining demand and unemployment.

Keynesian economists believe that the government can use fiscal policy to increase aggregate demand and reduce unemployment. Fiscal policy is the use of government spending and taxation to influence the economy. For example, the government can increase spending on infrastructure projects or provide tax breaks to consumers. This will increase aggregate demand and lead to increased production and employment.

Keynesian employment theory has been influential in economic policy since the Great Depression. Keynesian policies were used to help economies recover from the Depression and to prevent future depressions. Keynesian policies are still used today to combat recessions and unemployment.

The main criticisms of Keynesian employment theory are that it can lead to inflation and that it can be difficult to implement in practice. However, Keynesian theory remains an important part of modern economics.

In addition to fiscal policy, Keynesian economists also support the use of monetary policy to influence aggregate demand. Monetary policy is the use of interest rates and the money supply to influence the economy. For example, the central bank can lower interest rates to make it cheaper for businesses to borrow money and invest. This can lead to increased investment and aggregate demand.

Keynesian employment theory is a complex and nuanced body of thought. However, the basic idea is that the government can use fiscal and monetary policy to influence aggregate demand and reduce unemployment.

4.3] Consumption Function

The consumption function is a macroeconomic relationship that shows the relationship between consumption expenditure and disposable income. It is typically represented by the following equation:

C = a + bY

where:

• C is consumption expenditure
• Y is disposable income
• a is autonomous consumption (the amount of consumption that occurs even when disposable income is zero)
• b is the marginal propensity to consume (MPC) (the fraction of each additional dollar of disposable income that is consumed)

The consumption function can be used to predict consumption expenditure at different levels of disposable income. For example, if the MPC is 0.8, then an increase in disposable income of $100 would lead to an increase in consumption expenditure of $80.

Average Propensity to Consume (APC)

The average propensity to consume (APC) is the ratio of consumption expenditure to disposable income. It is calculated as follows:

APC = C / Y

The APC measures the fraction of disposable income that is consumed. For example, if the APC is 0.7, then 70% of disposable income is consumed.

Marginal Propensity to Consume (MPC)

The marginal propensity to consume (MPC) is the fraction of each additional dollar of disposable income that is consumed. It is calculated as follows:

MPC = ΔC / ΔY

where:

• ΔC is the change in consumption expenditure
• ΔY is the change in disposable income

The MPC measures the change in consumption expenditure that results from a change in disposable income. For example, if the MPC is 0.8, then an increase in disposable income of $100 would lead to an increase in consumption expenditure of $80.

Relationship between APC and MPC

The APC and MPC are related as follows:

APC = MPC + (a / Y)

This relationship shows that the APC is equal to the MPC plus the ratio of autonomous consumption to disposable income.

Example

Suppose the following data is given:

• Disposable income (Y) = $1,000
• Consumption expenditure (C) = $800
• Autonomous consumption (a) = $200

The APC would be calculated as follows:

APC = C / Y = $800 / $1,000 = 0.8

The MPC would be calculated as follows:

MPC = ΔC / ΔY = (C – a) / Y = ($800 – $200) / $1,000 = 0.6

The relationship between the APC and MPC can be verified as follows:

APC = MPC + (a / Y) = 0.6 + ($200 / $1,000) = 0.8

4.4] Factors influencing consumption function

The consumption function is the relationship between disposable income and consumption expenditure. It shows how much of their disposable income consumers will spend on goods and services.

There are a number of factors that can influence the consumption function, both subjective and objective.

Subjective factors

• Consumer confidence: Consumers are more likely to spend when they are confident about the future economic outlook.
• Tastes and preferences: Changes in tastes and preferences can lead to changes in consumption patterns. For example, the rise of the internet has led to a decline in spending on traditional forms of media such as newspapers and magazines.
• Demographics: Demographic factors such as age, family size, and education can also influence consumption patterns. For example, young people are more likely to spend on leisure and entertainment, while older people are more likely to spend on healthcare.

Objective factors

• Disposable income: The most important factor influencing consumption is disposable income. As disposable income increases, consumption expenditure also increases. However, the relationship between income and consumption is not linear. The marginal propensity to consume (MPC), which is the change in consumption divided by the change in income, is typically less than 1. This means that as income increases, a smaller proportion of the additional income is spent.
• Wealth: Wealth can also influence consumption. Consumers with a high level of wealth are more likely to spend a smaller proportion of their income than those with a low level of wealth.
• Interest rates: Interest rates can influence consumption by affecting the cost of borrowing. When interest rates are high, consumers are less likely to borrow money to finance consumption.
• Government policies: Government policies such as taxes and social security benefits can also influence consumption. For example, a reduction in taxes can increase disposable income and lead to an increase in consumption.
• Availability of credit: The availability of credit can also influence consumption. When credit is easily available, consumers are more likely to borrow money to finance consumption.

Other factors

• Advertising: Advertising can influence consumption by creating wants and needs.
• Unexpected events: Unexpected events such as natural disasters or wars can also influence consumption.

In addition to these factors, the consumption function can also be influenced by long-term trends such as technological change and globalization.