Assumptions of Say’s Law:
Prof. Mahendra Kumar Ghadoliya
The say’s law takes the following
assumptions of the classical school:
1.
All markets are
perfectly competitive so that agents decide how much to buy and sell on the
basis of a given set of prices which are perfectly flexible. The required
amount of labour and capital can be raised from the market on prevailing
prices.
2.
Firms are free to
enter or exist without affecting the equilibrium output and prices in the
market.
3.
The market is capable
of expansion. It expands with the increase in the volume offered for sale in
the market.
4.
All economic agents
(like firms and households) are rational and aim to maximise their profits or
utility; further more they do not suffer from money illusion.
5.
All savings are
automatically invested and this equality is brought about by the changes in the
rate of interest.
6.
Full employment is
considered to be normal situation and any lapses from full employment are
considered to be abnormal.
7.
Full employment is
guaranteed because of free play of market forces. The government does not
interfere in the automatic functioning of the economy. As any interference with
the free play of market forces shall
fail to bring about full employment.
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