Question

1. Expand on Says Law to explain the "laissez-faire" policy conclusion of classical economics. First, how does supply create its own demand? Next, in case there is some kind of external shock, explain how demand and supply interact with flexible prices to self-regulate the economy, with a natural tendency to full employment.

2. Explain how Micro-economics represents the classical policy recommendation of laissez-faire and what kind of Macro-economic policy follows that policy.

Answer 1

Saya law or the law of market , is the claim that the production of a product creates demand for another product by providing something of value which can be exchanged for that other product. So, production is source of demand.

According to says law, When a producer decides for production of a good then this will increase employment and hence due to increased employment money supply will increase and due to increase in money supply people will demand more and supply ultimately creates its own demand.

Laissezfaire is a policy of minimum governmental interference in the economic affairs of individuals and society. Its proponents cited the assumption in classical economics of a natural economic order as support for their faith in unregulated individual activity.

Market forces are the factors that influence the price and availability of goods and services in a market economy, i.e. an economy with the minimum of government involvement.

Market forces push prices up when supply declines and demand rises, and drive them down when supply grows or demand contracts. When demand equals supply for a product or service, the market is said to have reached equilibrium.