Market Economy Notes

His goal in writing the work was to explain the source of mankind’s ability to form moral judgments, In spite of man’s natural Inclinations towards self-interest. Smith proposes a theory of sympathy, In which the act of observing others makes people aware of themselves and the morality of their own behavior. -The Wealth of Nations: In this book, he established his political argument against mercantilism. Mercantilism is the economic theory that trade generates wealth and is stimulated by the accumulation of profitable balances, which a government should encourage by means of protectionism.

An essential part of the argument was for new political arrangements to be established. He argued that the basic unit for social analysis should be the nation, not the state. In this and other works, he expounded upon how rational self-interest and competition can lead to economic prosperity. -In his works, Adam Smith used the phrase “the invisible hand”. He introduced this theory because he was trying to answer the question, “How do we survive In a world where we must depend on others, but humans are by nature self-interested Individuals?

The theory for the invisible hand states that If each consumer Is allowed to choose freely what to buy and each producer Is allowed to choose freely what to sell and how to produce it, the market will settle on a product distribution and prices that are beneficial to all the individual members of a community, and hence to the community as a whole. The reason for this is that self- interest drives actors to beneficial behavior in a case of serendipity. Efficient methods of production are adopted to maximize profits.

Low prices are charged to maximize venue through gain In market share by undercutting competitors. Investors Invest in those Industries most urgently needed to maximize returns, and withdraw capital from those less efficient in creating value. All these effects take place dynamically and automatically. In other words, the market mechanism is self-regulating. Profit Motive: -The desire for profit that motivates one to engage In business ventures. Such a motive can be an individual’s self-interest.

The Law of Supply and Demand: -The amount of a commodity, product, or service available and the desire of buyers or it, is considered as factors regulating its price. In other words, individuals who are free to pursue their self-interest will produce goods and services that others want, at prices others will be willing to pay. Law of Competition: as increasing profits, market shares, and sales volume by varying the elements of the marketing mix: price, product, distribution, and promotion. This compels producers to be increasingly efficient, and to respond to the desires of consumers.

Laissez Fairer (“Leave it be”): This is an economic system in which the government should have little interference with the free and efficient workings of the market.