Question

Briefly describe the two conclusions that can be drawn from an overview of Say’s Law with its emphasis on macroeconomic supply and Keynes’ Law with its emphasis on macroeconomic demand. Explain the purpose of an AS curve and describe the characteristics of a typical AS curve.

Answer 1

Say's law says that supply creates its own demand. And that all income earned is consumed. Thus there is no income saved.

Keynes rejected this theory and said that all income is not consumed but some income is also saved. His emphasis was on demand side wherein effective demand represents money actually spent by people on products of industry. Aggregate demand at which level of employment is the same as aggregate supply is called effective demand.

Aggregate supply curve shows receipts or revenues which must be received by entrepreneurs so as to provide employment. It depends on the physical and technical conditions of production which do not change in short run.

In classical theory AS curve is vertical which in Keynesian AS curve is upward sloping.