Chapter 12: competition and the invisible hand

Invisible hand properties

- the minimalization of total industry costs of production

- the balans of industries

IN property 1

the minimalization of total industry costs of production

Invisible hand property ... says that even though no actor in a market economy intends to do so, in a free-market P=MC1=MC2=...=MCn and as a result, the total industry costs of production are minimized

IN 2

the balans of industries

As firms enter, supply increases and prices decrease, which reduces profits. Losses encourage exits, but what happens to price and profits when firms exits an industry? As firms exit, supply decreases and price increases, which increases profits. Thus, there is a tendency for the profit rate in all competitive industries to go to zero (normal profits)

The total value of production is maximized because if the profit rate in on industry is greater than the other, total value would increase if resources were to move from the less profitable industry to the more profitable industry

creative destruction

Although profit rates in all competitive industries tend towards the same level, that's just a tendency. Change is constant - tastes change, technologies change, and in their pursuit of profit, entrepreneurs are always trying to discover new and better products and processes - so some profitable industries are always popping up and some unprofitable industries, as well. So, although the great resources are always moving towards an increase in the value of production. In a dynamic economy, entrepreneurs listen to price signals, and they move capital and labor from unprofitable industries to profitable industries

elimination principle

Above- normal profits are eliminated by entry and below normal profits are eliminated by exit

the ... serves as both a warning and an opportunity to entrepreneurs. Stand still and fall behind. Leap ahead and profits may follow. In a dynamic economy, there is a constant dance between elimination and innovation