Adam smith

Who was Adam Smith?

An 18th-century Scottish economist, often called the “father of modern economics.”

What is Smith’s most famous book?

The Wealth of Nations

What economic system did Smith support?

Free market capitalism.

What is the “invisible hand”?

The idea that individuals pursuing self-interest unintentionally benefit society.

How does the invisible hand allocate resources?

Through price signals in competitive markets.

Why is the invisible hand important?

It explains how markets can work efficiently without government intervention.

What is division of labour?

Breaking production into smaller, specialised tasks.

Why does division of labour increase productivity?

• Workers become more skilled

• Time is saved switching tasks

• Encourages innovation

What are limitations of division of labour?

• Worker boredom

• Reduced creativity

• Dependency on others

What is laissez-faire?

Minimal government intervention in the economy.

Why did Smith support free markets?

They promote efficiency, innovation, and growth.

What role does competition play?

It drives down prices and improves quality.

Did Smith believe in no government at all?

No

What are the 3 key roles of government?

• Defence

• Justice (law & order)

• Public goods (e.g. infrastructure)

Why provide public goods?

Because markets may fail to supply them.

Did Smith recognise market failure?

es, but believed it was limited.

Examples he would accept government intervention for?

• Public goods

• National defence

• Legal systems

What did Smith mean by self-interest?

ndividuals act to maximise their own benefit.

Why is self-interest beneficial?

It leads to efficient outcomes via competition.

How does division of labour affect economic growth?

Increases output and efficiency → higher GDP.

What limits division of labour?

Size of the market.

What is the price mechanism?

System where prices allocate resources based on supply and demand.

How does the price mechanism signal shortages?

Prices rise → encourages more supply.

What are criticisms of Adam Smith?

• Ignores inequality

• Assumes perfect competition

• Underestimates market failure

• Externalities not addressed

Modern relevance?

Still influences free-market policies globally.