Question 1

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

Accepted Answer

The "invisible hand" is the concept in economics that suggests that individuals pursuing their own self-interest can lead to a better outcome for society as a whole. In a market economy, prices of products are determined by the intersection of supply and demand. This means that prices reflect both the values that society places on those products (as shown by the demand for them) and the costs to society of producing those products (as shown by the supply of them). Therefore, the correct answer is C.

Question 2

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

Accepted Answer

The invisible hand concept, coined by Adam Smith, refers to the idea that in a market economy, individuals pursuing their own self-interests will inadvertently promote the public or social interests. This is because in seeking greater profit, individuals will produce goods and services that are in demand, driving prices down and making them accessible to more people, thus increasing overall economic welfare. There is no need for central planning or majority rule, as the market itself guides the allocation of resources.

Question 3

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

Accepted Answer

Both a decrease in supply and a decrease in demand will cause the equilibrium quantity to decrease. The effect on price is ambiguous as the two forces are working in opposite directions.

Question 4

Adam Smith's invisible hand principle stresses

Accepted Answer

Adam Smith believed that the invisible hand of the market would guide self-interested individuals to engage in activities that would enhance the overall economic welfare of society. This would happen through the competitive market process, where buyers and sellers compete with each other to pursue their self-interest, leading to efficient allocation of resources and increased production. Smith did not rely on government regulation or benevolence as primary motivators for economic activity.

Question 5

Prices direct economic activity in a market economy by

Accepted Answer

Prices serve as signals to both buyers and sellers in a market economy. When prices are high for a particular good or service, it signals to producers to produce more of that good or service to meet the demand, and it signals to consumers to potentially buy less of that good or service due to its higher price. When prices are low for a particular good or service, it signals to producers to produce less of that good or service due to the lack of demand, and it signals to consumers to potentially buy more of that good or service due to its lower price. Therefore, prices influence the actions of buyers and sellers, leading to the allocation of resources in the market economy.

Question 6

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 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

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 demand and supply have increased. However, the shift in demand must be greater than the shift in supply in order for both price and quantity to increase. This is because an increase in demand will lead to a higher equilibrium price and quantity, while an increase in supply will only lead to a higher equilibrium quantity but not necessarily a higher price. Therefore, option B is the best explanation.

Question 9

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

Accepted Answer

According to Adam Smith, the primary source of a nation's wealth is the people's ability to produce products and trade in free markets. He believed in the concept of laissez-faire economics and free trade, where individuals and businesses are free to make their own economic decisions without government intervention. Smith's ideas were instrumental in the development of classical economics and the modern capitalist system.

Question 10

According to the invisible hand principle, competitive markets generally

Accepted Answer

The invisible hand principle proposes that in competitive markets, each individual acting in their self-interest will ultimately lead to the most efficient allocation of resources for society as a whole. This occurs without the need for central planning or coordination. Therefore, choice A is the best answer. Choices B and C both suggest a need for centralized planning, which is contrary to the invisible hand principle. Choice D suggests that producers benefit at the expense of consumers and taxpayers, which is not necessarily the case in a competitive market where all parties are able to benefit.

Question 11

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

Accepted Answer

Adam Smith's famous observation that households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes is a central concept in his book, The Wealth of Nations.

Question 12

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 13

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 14

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

Accepted Answer

Prices are not designed to ensure an equitable distribution of goods and services. Instead, prices reflect the relative scarcity of goods and services, indicating that those who are willing and able to pay more will be able to obtain more of these resources. The market system does not strive to achieve a perfectly equal distribution of goods and services, but rather to allocate them efficiently based on consumers' willingness to pay.

Question 15

"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 from Adam Smith's book "The Wealth of Nations."

Question 16

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

Accepted Answer

The invisible hand concept, as proposed by Adam Smith, suggested that when individuals pursue their own interests in a free market economy, the resulting competition and price signals would lead to overall economic prosperity. This implies that a laissez-faire approach to the economy, free from excessive government intervention and regulation, is more likely to bring about prosperity than attempts to change the inherent self-interest of individuals.

Question 17

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

Accepted Answer

Adam Smith is famously known for introducing the concept of an "invisible hand" in his book The Wealth of Nations. He argued that individuals pursuing their own self-interest in a market economy would ultimately benefit society as a whole, as if guided by an invisible hand.

Question 18

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

Accepted Answer

When supply decreases greatly and demand decreases slightly, the equilibrium price will increase because the decrease in supply will create a shortage, which will push up the price. The decrease in demand, while it may reduce the quantity exchanged, will not have as significant an effect on the price as the decrease in supply. The equilibrium quantity will decrease because both supply and demand have decreased, but the decrease in supply is much greater than the decrease in demand, resulting in a net decrease in the quantity exchanged.

Question 19

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, the supply curve shifts to the right and the demand curve shifts slightly to the right too. As a result, the equilibrium quantity will increase, but the effect on equilibrium price is uncertain. However, since supply has increased greatly, it can be assumed that the increase in quantity supplied will have a greater impact on price than the slight increase in demand. Therefore, the equilibrium price will fall and equilibrium quantity will rise.

Question 20

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 for a good will result in an increase in the equilibrium quantity, as there are now more units available and more units being purchased at the same price. The price will depend on the relative magnitude of the shifts in supply and demand, so it cannot be determined with certainty.

Quiz 3: Demand, Supply, and the Market Process