<< Chapter < Page Chapter >> Page >

Keynes’ law and the macroeconomics of demand

The alternative to Say’s law, with its emphasis on supply, can be named Keynes’ law    : “Demand creates its own supply.” As a matter of historical accuracy, just as Jean-Baptiste Say never wrote down anything as simpleminded as Say’s law, John Maynard Keynes never wrote down Keynes’ law, but the law is a useful simplification that conveys a certain point of view.

When Keynes wrote his great work The General Theory of Employment, Interest, and Money during the Great Depression of the 1930s, he pointed out that during the Depression, the capacity of the economy to supply goods and services had not changed much. U.S. unemployment rates soared higher than 20% from 1933 to 1935, but the number of possible workers had not increased or decreased much. Factories were closed and shuttered, but machinery and equipment had not disappeared. Technologies that had been invented in the 1920s were not un-invented and forgotten in the 1930s. Thus, Keynes argued that the Great Depression—and many ordinary recessions as well—were not caused by a drop in the ability of the economy to supply goods as measured by labor, physical capital, or technology. He argued the economy often produced less than its full potential, not because it was technically impossible to produce more with the existing workers and machines, but because a lack of demand in the economy as a whole led to inadequate incentives for firms to produce. In such cases, he argued, the level of GDP in the economy was not primarily determined by the potential of what the economy could supply, but rather by the amount of total demand.

Keynes’ law seems to apply fairly well in the short run of a few months to a few years, when many firms experience either a drop in demand for their output during a recession or so much demand that they have trouble producing enough during an economic boom. However, demand cannot tell the whole macroeconomic story, either. After all, if demand was all that mattered at the macroeconomic level, then the government could make the economy as large as it wanted just by pumping up total demand through a large increase in the government spending component or by legislating large tax cuts to push up the consumption component. Economies do, however, face genuine limits to how much they can produce, limits determined by the quantity of labor, physical capital, technology, and the institutional and market structures that bring these factors of production together. These constraints on what an economy can supply at the macroeconomic level do not disappear just because of an increase in demand.

Combining supply and demand in macroeconomics

Two insights emerge from this overview of Say’s law with its emphasis on macroeconomic supply and Keynes’ law with its emphasis on macroeconomic demand. The first conclusion, which is not exactly a hot news flash, is that an economic approach focused only on the supply side or only on the demand side can be only a partial success. Both supply and demand need to be taken into account. The second conclusion is that since Keynes’ law applies more accurately in the short run and Say’s law applies more accurately in the long run, the tradeoffs and connections between the three goals of macroeconomics may be different in the short run and the long run.

Key concepts and summary

Neoclassical economists emphasize Say’s law, which holds that supply creates its own demand. Keynesian economists emphasize Keynes’ law, which holds that demand creates its own supply. Many mainstream economists take a Keynesian perspective, emphasizing the importance of aggregate demand, for the short run, and a neoclassical perspective, emphasizing the importance of aggregate supply, for the long run.

References

Keynes, John Maynard. The General Theory of Employment, Interest and Money . London: Palgrave Macmillan, 1936.

U.S. Department of Commerce: United States Census Bureau. “New Residential Sales: Historical Data.” http://www.census.gov/construction/nrs/historical_data/.

Questions & Answers

this means that the demand curve have negative relationship with the price ..which means that when high price low demand of the product and vice versa so higher price will shirnk the demand of product
Ahsan Reply
Higher price level ∴Real value of household wealth increase ∴Net export decrease ∴More money needed, interest rate increase, investment decrease
sirius
a person has 60birr to buy two commodities,x and y the price of x is four birr unit the price of y is two birr unit his utility functio given by u=xy+2x determine the budget equation
Mohammed Reply
What are the various reasons for the Federal Reserve to increase the fed rates?
AMEEN Reply
What is unemployment
Mijash Reply
Unemployment is a term used to describe people who do not hold a paying job
JASON
what are the causes of unemployment
evans
unemployment refer to the situation in which people searching job but they have no. it also refers in which marginal productivity in zero.
Ramu
Causes of unemployment are: 1: Over Population 2: Break down of the family system 3: Rural/Urban Migration
Umar
unemployment simply means, in the situation where by people are looking for a job and their could achieve it.
Faruk
suppose you're the economist of ethiopia; when the country is face high rate of inflation what you recommend as one economist?
Roba Reply
if consumer spend all their incomes on consumption what does it mean?
Roba
if the government spends more of its revenue on development infrastructure from the budget it have and lower tax collection the budget deficit will run why?
Roba
because tax is less than revenue
Bhat
what is demand
Sunday Reply
Demand is the quantity of goods and services that consumers are willing and able to purchase at various prices over a given period of time
adu
demand is the ability back the willingness to purchase something with a specific price within a period of time
Ousman
the total value of goods and services produced by a coutry in it's own territorial area( mainly in a year) is called GDP
fareeha Reply
GDP- the total value of goods produced and services provided in a country during one year.
fareeha
What is the formula for propensity to save
Zubair
there is no formula for propensity to save but it has a two types one is average propensity to save and marginal propensity to save where Apc is equal to saving divide by income and mpc is equal to change in saving due change in income
Bhat
yes ooo
Sunday
yes
Ahmed
okay
kawu
what is time in economics?
Sunday
what is gross domestic product
Moonga Reply
what is macroeconomics
Dickison Reply
this is the branch of economics that deals with wide range
Ousman
what is macroeconomics
Majid Reply
what is macroeconomic analysis
Deogratius Reply
Macroeconomics is a branch of the economics that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product (GDP) and changes in unemployment Read m
wasay
Macroeconomics is a branch of the economics that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product (GDP) and changes in unemployment
wasay
what is wage in economics?
Sunday
what is economic
Wajeed Reply
Economics is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. 
ninad
Economics is the brench of science that deals with the study of human behavior as it related to end or scare means which have alternative used.
Jimmy
Economics is a science that studies human behavior as a relationship between ends and scarce means which have alternative uses
Don
Economics as a social science does not have a definite definition, because it has been defined by many economist the most appropriate one was the one defined by Lord Lionel Robbin in 1932. He defined economics as a social science which study human behavior as a relationship between end and scare m..
Ernest
what is inflation
Junaid Reply
Inflation is simply a situation in an economy where there is a persistent rise or increase in the prices of goods and services in a particular year(say current year)
JERRY
It can still be defined as a situation in an economy where there's a persistent fall in the value of money
JERRY
it is the persistent rise in the general price of goods and services in an economy leading to the fall in the values of money
Muafue
It could mean the central bank has a deficit in reserve unable to cope with low export and exit of foreign investments.
Wong
inflation is the general increase in a commodity with in a country.
Jimmy
Mr Fallah please take the definition again that one is not clear
Muafue
the persistence in general price of commodities
ezechy
The persistence rise in the general price level
Muafue
The persistence rise in general price of commodities
Delhill
Inflation is the persistent increase in price of goods and services over a given period of time.
Ernest
what is willingness
Bilal Reply
Is a person Able,Capable and Anxious to something
Muafue
Is when a person is able,capable and Anxious to do something
Muafue
thanks sir g.
Bilal
u are welcome
Muafue
where you from
Bilal
Cameroon
Muafue
And you
Muafue
Pakistan
Bilal
How far are you in Education
Muafue
who about my question What is MPC
sabawoon
is marginal propensity to consume
Muafue
a little more
sabawoon
sorry muafue sir you are little bit wrong about willingness *willingness reffers how much wants . it could be wants for payment or wants for something to do.
Masadaq
MPC reffers *How much want to consume*.
Masadaq
MPC is Marginal Propensity to Consume. MPC is proportion of additional spent on consumption.
Bon
MPC is Marginal Propensity to Consume. MPC is the proportion of additional income spent on consumption.
Bon
What is difference between GNP and GDP?
Zahid
GNP is gross national product. In calculating GNP we include net national income from abroad while GDP is gross domestic product and in calculating it we use on expenditure, income and output from within the country. My name is JERRY NGONDA from Cameron
JERRY
GNP.the total value of good $service currently produce w a given period of time by domestic owner GNP=NFI+GDP:GDP is a market value of final good $service currently produce in a given period of time w in a country boundery or territors.its take produce currently $etc
tade
yes.no suggestions
tade
good Tade Feyera
Masadaq
Tade Feyera can you send me your whatsap contact number.
Masadaq
when spending by the federal government exceeds net taxes?
stefany Reply
explain the difference between macroeconomics and microeconomics
Rahmo
Macroeconomics is the study of economics at the aggregate level while Micro is at the individual level.
Umar
Both indifference curve and isoquant do not intersect TRUE OR FALSE and justify your statement
John
what is long run and short run period
Kennedy

Get the best Macroeconomics course in your pocket!





Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Macroeconomics' conversation and receive update notifications?

Ask