Adam Smith's Invisble hand concept in real life
Adam Smith's theory states that everyone left to their own, will eventually bring an equilibrium in the state of economics in a given population, and this requires no central authority. Smith is quoted as saying "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, everyone will work towards their own interest and in the process, will bring good to the greater public interest. The invisible hand is where an apparent force seems to be directing the goods and produce to the intended recipients in the market, whereas in fact there isn't any central guiding authority.
Adam Smith's theory would remain in theory for the next 200 years after it was first coined in his book "An inquiry into the Nature and causes of the wealth of Nations" before it took shape after scholars such as Gerard Debreu, Kenneth Arrow and Lionel Mackenzie gives it a mathematical proof.
Basically, when someone offers a good or service, customer would opt for a cheaper alternative when available. This results in the first seller to reduce their price or offer something which is better. This self interest preservation would make everyone happy.
Example one
Demand for margarine is high at one point of time until people realized, after findings by scientists, that butter should be the choice of consumption rather than margarine, if good health is to be pursued. In time, demand for margarine reduces and for butter increases. Suppliers of margarine needed to scale back production while producers of butter increased theirs. No central authority ordered the margarine producers to do so, but they were doing so because demand was falling.
Because of butter and in effect, demand for dairy product increasing, everyone in the supply chain would need to adjust their buying and selling activities.
Because of butter and in effect, demand for dairy product increasing, everyone in the supply chain would need to adjust their buying and selling activities.
This is an example.
A person selling food at the market, for example fish, could initially sell it at too high a price, or in some circumstances too low. But overtime, the seller would adjust the price as they get more information what the other sellers are offering in terms of prices and size of fish.The fish seller would sell as much as he could, and people who come will buy as much as they need and are able to.
A new entrant in the market would change the market condition, if person B comes in the market where people were already buying from person A, and offers lower price with better service, person's A business would be effected as he sees his customers shift their preference to B. A would need to lower down his price hoping to see the customers return. This is where the invisible hand guides the market price towards equilibrium as person A tries to lower his price to a point where his lower profit margin could still increase his demand based on the price elasticity of demand to a point that it is still profitable for him. Once it doesn't, then he will stop decreasing his price, and an equilibrium will eventually be reached.
A person selling food at the market, for example fish, could initially sell it at too high a price, or in some circumstances too low. But overtime, the seller would adjust the price as they get more information what the other sellers are offering in terms of prices and size of fish.The fish seller would sell as much as he could, and people who come will buy as much as they need and are able to.
A new entrant in the market would change the market condition, if person B comes in the market where people were already buying from person A, and offers lower price with better service, person's A business would be effected as he sees his customers shift their preference to B. A would need to lower down his price hoping to see the customers return. This is where the invisible hand guides the market price towards equilibrium as person A tries to lower his price to a point where his lower profit margin could still increase his demand based on the price elasticity of demand to a point that it is still profitable for him. Once it doesn't, then he will stop decreasing his price, and an equilibrium will eventually be reached.
Beyond The Invisible Hand: Groundwork for a New Economics
The Wealth of nations
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