Question

Describe the mechanism by which supply creates its own demand.

Short answer

Say's Law states that supply creates its own demand.

Step-by-step solution

Step 1. Definitions.

Aggregate supply can be defined as the total volume of output produced in a region in a given period. Aggregate demand can be defined as the total volume of spending in a region in a given period.

Step 2. Say's Law.

Say's Law states that supply creates its own demand. The supply of goods requires a combination of factors of production for the production of goods and services. These factors of production in return receive factor inputs such as wages, salaries, rent, interest, and profit. These factor inputs are income for the households and the income they receive will create demand for the goods. This phenomenon is based on the fact that one person's expenditure is another person's income.