Question

Plese explain all in mircrosoft word

Define, discuss, and give a real world example that demonstrates the relationship between Adam Smith’s Invisible Hand Theory and Perfect Competition.

Answer 1

The unobservable forces of the market that helps supply and demand of a particular good to attain the equilibrium in the free market are invisible hands.

Adam Smith described that if the government does not intervene in the market and people perform transactions freely the economy can work well. He said that the invisible hands will tend to give positive output as in the free market traders compete with each other for self-interest. If there is no government intervention then the consumer will buy from the firm charging less price. The competition begins here, in order to sell more firms have to lower their price. The supply will be more as there will be a more demand of a good leaving everyone happy. The producer will get the price and consumer get his desired good.

An example of the invisible hand,

Suppose a consumer wants to buy a cold drink and a pizza to make him better off, that decision of consumer will make the society better off as a whole. The buying the cold drink and the pizza will make the seller better off because of income he will earn and it also tends to make the manufacturing market better off. Everyone will get benefitted as everyone getting better off with the transaction.

Perfect competition

A market where a number of firms offer homogeneous products.

The firms in the market are a price taker and industry is the price setter. The firms in the perfect market have these characteristics:

A large number of participants sell and buy standardized products

There are no barriers to entry

An individual firm has no control over the price

There is no non-price competition

The market demand curve is horizontal line and price is MR curve in the perfect competition.

Example: shopping in a local vegetable market, prices are always same and products are also homogeneous.