which of the following illustrates what happens when supply and demand work as they should, according to Adam Smith
- The price of a particular good increases when demand exceeds supply, leading to a decrease in demand and an increase in supply until equilibrium is reached.
This scenario illustrates the concept of supply and demand working as they should according to Adam Smith's theory of laissez-faire economics. In this situation, the market automatically adjusts by increasing the price of the good in response to excess demand. This higher price incentivizes suppliers to produce more of the good, increasing the supply. Eventually, the increased supply and higher price will lead to a decrease in demand until a state of equilibrium is achieved, where the quantity demanded equals the quantity supplied. According to Adam Smith, this dynamic process allows the market to efficiently allocate resources without the need for government intervention.
When supply and demand work as they should, according to Adam Smith's theory of free markets, the equilibrium price and quantity are determined in the market. This is illustrated by the concept of "invisible hand" in which individuals, motivated by self-interest, tend to act in ways that maximize their own welfare while unintentionally benefiting society as a whole.
In this scenario, both supply and demand are able to freely adjust to changes in market conditions. When there is an increase in demand for a product or service, the price will rise, signaling producers to supply more. On the other hand, when there is a decrease in demand, the price will fall, prompting producers to reduce their supply.
This mechanism ensures that resources are allocated efficiently and production is focused on the goods and services that are most in demand. As a result, producers are motivated to innovate, improve efficiency, and provide high-quality products at competitive prices. This system also allows consumers to have a variety of choices and ultimately benefits society as a whole by promoting economic growth and welfare.
In order to determine which scenario illustrates what happens when supply and demand work as they should, we need to understand the basic principles of Adam Smith's theory.
Adam Smith, a classical economist, believed in the concept of a free market. According to Smith, in a free market economy, supply and demand are self-regulating forces that naturally determine the price and quantity of goods and services.
Based on this understanding, we can look for a scenario that reflects the following characteristics:
1. Equilibrium: Supply and demand are balanced, leading to a stable price and quantity in the market.
2. Efficient allocation of resources: Resources are allocated efficiently to meet consumer demand and maximize overall societal welfare.
3. Competition: Market participants compete with each other, leading to improved quality and lower prices of goods and services.
Now, let's examine the options to find the one that best illustrates these principles.