Classical economists believe that supply creates demand—that the production of g
ID: 1208756 • Letter: C
Question
Classical economists believe that supply creates demand—that the production of goods generates demand. People working and making salaries spend their money on goods. The production of goods (supply) creates purchases (demand). Keynesian economists believe that the economy works the other way around—that increasing demand increases supply. Producers increase their supply in order to meet an increase in demand.
In your posting, comment on the following question:
Which of the two views of the economy is correct? Does supply create demand or does demand create supply?
Explanation / Answer
Both the views above are based on assumptions and were propagated as theories to explain the phenomenons in an economy at different points of time. However , the Keynes view is more modern approach as opposed to the classicals view. This is so because Classicals were not able to explain the Great Depression using their theory. Despite there being abundant lanor, people were out of work and stuation became so bad that the economy of US went into one of the biggest depression phases in history.
Keynesians however could explain the fluctuations in the economy and the busines cycles due to demand economics. This is why they could explain phenomena like boom, inflation, recession and depression. Also, their assumptions were more flexible, like they assumed wage price flexibility. Hence, the classicals were outdated by the Keynesians.