Question

The Invisible hand, coined by Adam Smith (widely regarded as the father of modern economics) describes the self-regulating nature of markets and the interactions of demand and supply to ensures markets are in equilibrium. If the quantity in a market is not at equilibrium, why is it likely to move towards equilibrium over time? Give examples of some markets, products, or industries where you recognize the "invisible hand" in action. If you believe that markets are not generally self-regulating, explain why and provide examples.

Answer 1

Invisible hand refers to how a product attains equilibrium naturally. As we know that in many countries government intervene to control the market conditions. But, Adam Smith proposed that market itself controls the price and quality of a product by attaining equilibrium in demand and supply of the respective product. This invisible force of the market to control demand and supply is called Invisible hand.

This can be explained in the following way:

If a seller sells a product for $10, other competitive sellers are also forced to sell their product at $10 or even lesser to attain sales. In this way both the sellers and also the consumers are benefited. In this way, market is stabilised itself without any intervention of government. This self-regulation of market to attain equilibrium is called Invisible Hand.

For Example: In Agricultural markets, a farmer sets a price for his 1 ton of corn on day 1. On day 2, he enquires the prices of 1 ton corn in the market and revises his price according to the market prices. In this way, market forces can acquire equilibrium.