Question 1

Adam Smith's invisible hand principle stresses

Accepted Answer

Adam Smith's invisible hand principle describes how the competitive market process can guide self-interested individuals to engage in activities that benefit society as a whole, even though their motivation is based solely on their own self-interest. This is because businesses and individuals will seek to produce and offer goods and services that are in demand and provide the most profit, which corresponds to meeting the needs and desires of consumers. As a result, the market can allocate resources efficiently and increase overall economic welfare.

Question 2

Assume that supply increases greatly and demand increases slightly. Which of the following will happen?

Accepted Answer

When supply increases greatly and demand increases slightly, there will be a surplus of goods which will push the price down. Therefore, the equilibrium price will fall. In addition, as supply has increased greatly, there will be more goods available in the market, which will lead to an increase in the equilibrium quantity.

Question 3

Which of the following is not a function of prices in a market system?

Accepted Answer

Prices do not ensure an equitable distribution of goods and services among consumers. Instead, they reflect the relative scarcity of goods and services, and consumers with higher purchasing power are able to buy more. The distribution of goods and services is influenced by other factors such as income, wealth, and government policies.

Question 4

Which of the following most accurately describes the invisible hand concept?

Accepted Answer

The invisible hand concept is the idea that in a market setting, individuals pursuing their own self-interest will result in the most efficient use of resources as a whole. This is because individuals will naturally seek to maximize their own profits, which leads to innovation, cost-cutting, and the production of goods and services that are in high demand. As a result, prices will be lowered and quality increased, ultimately benefiting society as a whole. This concept was popularized by Adam Smith in his book "The Wealth of Nations."

Question 5

Suppose both the equilibrium price and quantity fall for a particular product. Which of the following best explains this situation?

Accepted Answer

The answer of Suppose both the equilibrium price and quantity...

Question 6

In his book The Wealth of Nations , this famous economist argued that economic activity was directed by an "invisible hand."

Accepted Answer

Adam Smith argued in his book The Wealth of Nations that economic activity was directed by an "invisible hand."

Question 7

Assume that supply increases slightly and demand increases greatly. Which of the following will happen?

Accepted Answer

The answer of Assume that supply increases slightly and demand...

Question 8

Assume that supply decreases greatly and demand decreases slightly. Which of the following will happen?

Accepted Answer

Since supply greatly decreases, this will cause a shortage in the market, pushing the price up. The slight decrease in demand will not be enough to counterbalance this effect. As a result, the equilibrium price will rise and the equilibrium quantity will fall.

Question 9

Which of the following is a major implication of the invisible hand concept?

Accepted Answer

The invisible hand concept suggests that when individuals pursue their own self-interest in a competitive market, the resulting market price will guide their actions towards promoting overall economic prosperity. This means that the pursuit of self-interest can actually benefit society as a whole, without requiring any intentional coordination or planning.

Question 10

Suppose demand increases and supply decreases. Which of the following will happen?

Accepted Answer

The answer of Suppose demand increases and supply decreases. Which...

Question 11

If there is an increase in both the supply and demand for a good, which of the following will definitely occur?

Accepted Answer

An increase in both supply and demand will lead to an increase in the equilibrium quantity traded, as both factors are pushing towards higher levels of production and consumption. The change in price cannot be predicted, as it will depend on the magnitude of the shifts in supply and demand, and how they compare to each other. If the increase in supply is larger than the increase in demand, the price will fall; if the increase in demand is larger than the increase in supply, the price will rise.

Question 12

Prices direct economic activity in a market economy by

Accepted Answer

Prices play a vital role in influencing the actions of buyers and sellers in a market economy. They communicate information about the scarcity and demand of different goods and services, encouraging individuals to allocate resources in a way that maximizes their utility and profit. As prices rise due to increased demand or reduced supply, sellers may increase production or raise prices to maximize profits, while buyers may shift their consumption habits to substitute for cheaper alternatives. This process of price adjustment helps to allocate scarce resources in the most efficient manner possible. While government intervention may be necessary in certain cases, such as to correct externalities or redistribute wealth, prices remain a fundamental mechanism of economic activity in a market economy.

Question 13

Assume that supply decreases slightly and demand decreases greatly. Which of the following will happen?

Accepted Answer

The answer of Assume that supply decreases slightly and demand...

Question 14

"He [the producer] intends only his gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention." What famous economist made this statement?

Accepted Answer

This statement is famously known as the "invisible hand" concept, which is attributed to Adam Smith in his book "The Wealth of Nations."

Question 15

According to Adam Smith, what is the primary source of a nation's wealth?

Accepted Answer

Adam Smith believed that the primary source of a nation's wealth is its ability to produce goods and services, and to trade freely in markets without interference from government or other entities. He emphasized the importance of individual self-interest and competition as driving forces behind economic growth and prosperity. Therefore, option D is the correct answer as it reflects Smith's ideas about the importance of free markets and productive capacity in determining a nation's wealth.

Question 16

If there is a decrease in both the supply and demand for a good, which of the following will definitely occur?

Accepted Answer

When both the supply and demand for a good decrease, the equilibrium quantity will definitely decrease. The effect on price cannot be definitively determined without knowing the extent of the decrease in both supply and demand.

Question 17

According to the invisible hand principle, competitive markets generally

Accepted Answer

The invisible hand principle states that in competitive markets, the self-interest of individuals leads to an efficient allocation of resources, even without centralized planning. This is because individuals are motivated to pursue their own self-interest, such as maximizing profits or minimizing costs, which in turn leads to efficient resource allocation and production. The principle does not require centralized planning or conflict with the general interests of society, but rather assumes that individuals acting in their own self-interest will naturally lead to socially beneficial outcomes.

Question 18

Suppose both the equilibrium price and quantity rise for a particular product. Which of the following best explains this situation?

Accepted Answer

If both the equilibrium price and quantity rise, it means that both supply and demand have increased. However, the shift in demand is greater than the shift in supply, leading to a higher equilibrium price and quantity.

Question 19

Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?

Accepted Answer

Adam Smith's concept of the "invisible hand" represents the idea that when households and firms interact in markets, they are guided by an invisible hand that leads them to desirable market outcomes. This idea emphasizes the importance of markets in allocating resources and maximizing social welfare.

Question 20

When the "invisible hand" guides economic activity, prices of products reflect

Accepted Answer

The "invisible hand" operates in a free market economy where prices of products are determined through the interaction of supply and demand. As a result, prices often reflect both the values that society places on those products and the costs to society of producing those products. For example, if there is high demand for a product but low supply, the price will increase, reflecting both the value that society places on the product and the higher costs of production. In a free market economy, the government does not set prices directly, so choice D is not correct. Choices A and B are also incorrect because they suggest that prices reflect only one aspect of economic activity, rather than the interplay of supply, demand, and costs in a market economy.

Quiz 3: Demand, Supply, and the Market Process