Principles of Economics - Part II: The Role of Markets

market economy

where resources are allocated among households and firms with little or no government interference.

→ Markets bring trading partners together to create order out of chaos. Companies supply goods and services, and customers want to obtain the goods and services that companies supply.

invisible hand

a phrase coined by Adam Smith to refer to the unobservable market forces that guide resources to their highestvalued use.

→ Adam Smith, the founder of modern economics, described the dynamic best: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” In other words, producers earn a living by selling the products that consumers want. Consumers are also motivated by self-interest; they must decide how to use their money to select the goods that they need or want the most. This process, which Adam Smith called the invisible hand, guides resources to their highest-valued use.

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