which of the following illustrates what happens when supply and demand work as thye should, according to Adam Smith?
According to Adam Smith, when supply and demand work as they should, prices and quantities in a market will naturally reach an equilibrium. This means that the quantity supplied by producers will equal the quantity demanded by consumers, resulting in a balance where the market clears.
So, an example that illustrates this concept would be when the price of smartphones decreases due to advances in technology and increased competition. As a result, more consumers are willing and able to purchase smartphones at the lower price, leading to an increase in demand. On the other hand, manufacturers are motivated to produce and supply more smartphones at the lower price, as they can still make a profit. Eventually, the market reaches a point where the quantity supplied matches the quantity demanded at the given price, resulting in an equilibrium where supply and demand are in balance. This situation aligns with Adam Smith's notion of how supply and demand should work in a free market economy.
According to Adam Smith and his theory of free market economics, the following scenario illustrates what happens when supply and demand work as they should:
In a free market, where there is no government intervention or regulation, the price of a good or service is determined by the interaction of supply and demand. When supply and demand are in balance, it means that the quantity of the good or service being supplied by producers is equal to the quantity being demanded by consumers.
In this scenario, the price of the good will naturally settle at an equilibrium point where both buyers and sellers are satisfied. At this equilibrium price, there is no shortage or surplus of the product. Producers find it profitable to produce and sell at this price, while consumers find it satisfactory to purchase the good at this price.
This equilibrium is achieved through market forces. If the demand for a product increases, the price will rise, incentivizing producers to increase the quantity supplied, thereby meeting the increased demand. On the other hand, if demand decreases, the price will fall, prompting producers to reduce the quantity supplied.
Therefore, the scenario that illustrates what happens when supply and demand work as they should according to Adam Smith is when the quantity supplied is equal to the quantity demanded, resulting in a stable equilibrium price.
To determine which of the following illustrations align with Adam Smith's perspective on supply and demand, we need to understand the fundamental principles he advocated. Adam Smith, a renowned economist and philosopher, believed in laissez-faire economics, where markets operate freely without government intervention. According to Smith, when supply and demand work as they should, it leads to a state of equilibrium, also known as the "invisible hand" principle.
The "invisible hand" principle suggests that a market economy, driven by self-interest and competition, can reach an optimal allocation of resources. This means that supply and demand adjust to find a balance, resulting in an efficient allocation of goods and services.
Now, let's consider the illustrations:
1. Example: The price of a rare commodity increases due to high demand.
Explanation: This scenario represents the basic law of demand, where an increase in demand causes prices to rise. However, we still need to consider the supply side to assess if it aligns with Smith's perspective.
If the increase in price encourages producers to increase their supply and eventually leads to a new equilibrium with higher quantities available and prices reflecting the scarcity of the commodity, then this scenario could align with Smith's perspective. This is because it demonstrates how the invisible hand guides individuals to respond to market forces by adjusting their production levels to meet the demand.
2. Example: The government introduces price controls on a necessary product leading to shortages.
Explanation: This scenario suggests government intervention in the form of price controls. However, according to Smith's principles, direct government interference impedes the functioning of supply and demand. Price controls can distort the natural market forces, leading to unintended consequences such as shortages or surpluses. Therefore, this example does not align with Adam Smith's perspective.
3. Example: A new technology revolutionizes an industry, leading to increased supply and lower prices.
Explanation: This scenario represents the positive impact of innovation on a market. When new technologies improve production efficiency, the supply of goods increases. As a result, prices may decrease, benefiting consumers. This example aligns with Adam Smith's perspective as it showcases how market forces and technological advancements drive increased supply and lower prices, improving overall efficiency.
Based on the explanations, the example that best illustrates what happens when supply and demand work as they should, according to Adam Smith, is the third example: A new technology revolutionizes an industry, leading to increased supply and lower prices.