ECON 2540 - CH.9: Competition and Coordination: The Invisible Hand (PART 1)

Who created the book "The Wealth of Nations (1776)"?

Adam Smith

What was the basic challenge to society that Adam Smith identified in the book "The Wealth of Nations (1776)"

How to coordinate the independent activities of large numbers of economic actors - producers, transporters, sellers, consumers - often unknown to one another and widely scattered across the world.

What idea did Adam Smith develop in the book "The Wealth of Nations (1776)?"

Self-interested actions of individuals would create a system of competitive markets translating into material progress of all society (Essentially, society leave the coordination of the division of labour up to the individual self-interest of the economic actors themselves)

Why was Adam Smith's idea radical?

Radical at the time because it asserted that a rational order might arise without any person or institution consciously attempting to create or maintain that order. (everyone believed that we should be all unity and no person should act in self-interest)

What does the term "The Invisible Hand" refer to?

refers to the tendence of markets to guide the economy toward the best use of its human and natural resources

What should governments do in Adam Smith's POV?

not to interfere with the market, and should just enforce laws and contracts, and provide national defense.

What does Laissez-faire mean?

An approach to economic policy that advocates a very limited role for the government, confining its activities to national defense and the enforcement of laws and contracts.

Equilibrium

Where supply = demand, and its a point to which the market will tend to.

What happens if price is below equilibrium?

demand is high, and supply is low, therefore there is a shortage.

What happens if price is above the equilibrium?

demand is low, and supply is high, therefore there is a surplus.

How do you counter a shortage?

Increase price, therefore, the price point will move up along the demand curve, towards equilibrium.

How do you counter a surplus?

Decrease price, therefore, the price point will move down the supply curve, towards equilibrium.

How does a Demand/Supply curve shift?

the changing of externalities in a market. (change in taste, population, income, etc.)