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. The first conclusion 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. Privacy Policy. Skip to main content. Search for:. 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.
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. 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. If you still have questions or prefer to get help directly from an agent, please submit a request. Says Law of Markets is a theory in classical economic that states that product production is the reason why we have demand. According to this theory, being able to demand something is financed by the supply of a different product. Says the law of markets was created in by a French journalist and classical economist known as Jean-Baptiste Say.
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