Question

In: Economics

7. Under what circumstances, according to Adam Smith, might the market price of some good remain...

7. Under what circumstances, according to Adam Smith, might the market price of some good remain permanently above its natural price?

Solutions

Expert Solution

Real Price is the value of an object in terms toil and trouble saved. It is ultimately a psychological measure. Smith measures this in terms of food, specifically corn.

Nominal Price is the value of an object in terms of currency or other commodities. It is ultimately a numerical measure.

The circumstances for the market price of some good remain permanently above its natural price were:

One is demographic.

Consider a closed economy where several markets are monopolized. Since the expenditure flows of the various monopolists are closely interlinked the members of each corporation sell their commodity dear, that is at a supra-competitive price, but, at the same time, they buy all other monopolized commodities equally dear − the general price level of such an economy turns out to be higher than that which would ideally obtain in a freely competitive environment.

Two as there is no corporation of the dealers in cloth there is no one who regulates the price of it. State regulation is aimed at achieving a kind of second best, the first best being achieved by a freely competitive economy.

Monopoly trade distrupts trade and price of the goods will be controlled by few monopolistics.to avoid this Smith claim for government intervention in free market economy for balance of trade.


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