Say’s Law in Barter Economy

According to Say,”Supply create its own demand”. This is explained as: According to Say, whatever is produced in the barter economy is sold out”. Hence, nothing remains unsold and there is no possibility of over production. As a result, there is no possibility of general unemployment. For example, if a person produces cloth while the other produces wheat, they both exchange with one another. Hence noting will remain unsold and o producer will face losses. Consequently, there will be no unemployment.

In the barter economy people produce goods either for their own use or to exchange them for other goods, so, in this process there is an aggregate demand as well as aggregate supply. Under this mechanism, it is the value of good which clears the market. If the price of one good is higher than that of another good, the resources will shift from the production of low value good to the production of high value good. In this way the value of the good will fall where the resources are moving and value of the good will rise where from the resources are coming out. In this way value equalization process starts till the equilibrium value is settled in the market.

This will ensure that in the barter economy the goods will be exchanged at some positive value. Moreover, from this discussion we find that the entire economic system is run on the basis of price mechanism. The good which has a demand will have a supply. In other words people supply the goods and services only because they want other goods and services. Thus, according to Say”AS=AD”.

This means that the supply in N markets is equal to the demand in N markets.

All the above discussion shows that there is an automatic mechanism whereby all the produced goods are exchanged for one another. As a result, nothing will remain unsold and no body will face losses and unemployment.