Does supply create it's own demand or does demand create the supply? Support your argument with a few examples
Answer:
when we talk of supply side economics its of clasical theory. they believed in the operation of the free economy, without any government, According to the classical theory if an economy is left to itself it will adjust automatically to changes and the level of economic activities.
the classical theory believed in the eficiency of the invisible hand and they claimed that a free market economy will always operate at full employment, therefore it will always be in equlibrium.
according to them when production takes place it generates factor income of an equivalent amount, the factor incomes become purchasing power in the hands of people with which they can buy whatever have been produced.
unemployment was nil and if any would be only temporary as unemployment will be removed as the excess labour will cause wages to fall, and this fall will induce firma to emplay more labour. the labour will get incomes as their purchasing power which ultimately allows them to buy the goods and services available to them.
the classical theory failed and therefore the keynesian theory came out.
According to this theory demand will create its supply. according to them the economy will be in equilibrium when the aggregate demand = the aggregate supply,
for them it is the demand that should be managed instead of supply. because when people will demand goods then only there will be an accelerator effect and output and investment will increase so as to meet demand so here iot is demand that influences supply
I don't think it is either one of these choices.
Firms do not have perfect information about what consumers want. So, firms introduce lots of products to see what consumers will buy. Lots of products fail, and lots of firms also go bankrupt.
In the same way, consumers don't have perfect information about products either. We try different types of cereals, cars, music, etc. until we find something we like.
supply does not create demand.
This is a macro economic rather than a micro economic question. According to traditional or classic economic theory, an increase in the overall ability of an economy to produce more, i.e an increase in aggregate supply, will result in an increase in aggregate demand to buy that supply.
According to Keynesian economics, however, there may be inadequate aggregate demand to buy everything that could be produced leading to unemployment and a depression. In this case, government policies that increase aggregate demand (e.g. reducing taxes) will result in an increase in aggregate supply to meet the demand.
In the very first year of its exsistence, there was a commercial on TV for the Infinity automobile, before there was even one built.
It was either Playstation or some other game box company, made fewer products than they knew would sell to justify an inflated price.
Nintendo Wii tried the same thing and it backfired. No that many wanted.
My point... Demand CAN be created. Just ask Bill Gates.
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