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I am confused about this sentence.

That T-shirt must be expensive because it's by a famous designer.

I think the complete sentence should be the following one.

That T-shirt must be expensive because it's designed by a famous designer.

Can designed can be omitted in that example?

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Yes, you may omit designed here.

By has the sense here of "created by" and is an unremarkable use with works of all sorts: this novel is by Faulkner, this play is by Shakespeare, this painting is by Raphael, this perfume is by Lanvin, and so forth.

The use is extended to any work whose appeal lies in the personal "creativity" of its maker. Here for instance is the website of Pens by Norman, which sells very fancy ballpoint pens; and here is the website for Meals by Genet, an Ethiopian restaurant in Los Angeles.

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