Aggregate demand and say''s law, Macroeconomics

Aggregate demand and Say's Law 

YD = YS in the classical model (Say's law)

Aggregate demand YD is defined as quantity of nationally produced finished services and goods that consumers, government and rest of the world want to buy under given conditions. One of the main elements of classical model is Say's Law. According to Say's Law aggregate demand is always equal to aggregate supply: YD = YS

Say's Law is a number of times defined as 'supply creates its own demand'. Motivation for this statement is something like this. If production (YS) increases by one billion, national income would also increase by one billion. It means that individuals will have exactly one more billion for spending - just enough to buy increase in production. So YD will also increase by one billion. An increase in the supply of one billion has created an increased in demand by the same amount.  

In the classical model, observed GDP Y would be equal to aggregate supply: Y = YS. GDP is concluded completely by the firms and there is no need to model aggregate demand. It's always the case that YD = Y = YS = f (L, K).

Posted Date: 8/14/2013 2:12:11 AM | Location : United States

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