Question 1

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

Accepted Answer

Adam Smith's concept of wealth of nations is based on the people's ability to produce products and trade in free markets, rather than focusing on gold and silver or central planning authorities. This concept is known as laissez-faire economics and suggests that a nation's economy will thrive if left alone by the government and allowed to function according to its own laws and regulations.

Question 2

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

Accepted Answer

The "invisible hand" refers to the market forces of supply and demand that guide economic activity. In a competitive market, prices of products are determined by both the values that society places on those products (i.e. the demand for them) and the costs to society of producing those products (i.e. the supply of them). Therefore, choice C is the correct answer. Choices A, B, and D are incorrect as they do not accurately describe the role of the "invisible hand" in setting prices.

Question 3

Market prices are

Accepted Answer

Market prices convey information about the supply and demand of products, as well as the relative scarcity of resources. They are determined by the interactions of supply and demand in voluntary exchange. Therefore, all of the above choices are true.

Question 4

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 shift the demand curve to the right and the supply curve to the left. This will result in a higher equilibrium quantity as both buyers and sellers are willing to exchange more of the good at a higher price. However, the price may increase, decrease, or stay the same depending on the magnitudes of the shift in supply and demand. Without more information, we cannot determine the direction of the price change.

Question 5

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 the economist who argued that economic activity was directed by an "invisible hand" in his book The Wealth of Nations. Alfred Marshall, Milton Friedman, and David Ricardo are other notable economists, but did not use this specific phrase or idea in their work.

Question 6

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

Accepted Answer

If both the supply and demand decrease, it means that there is less of the good available and less consumers willing to buy it. This will result in a decrease in the equilibrium quantity (quantity at which supply equals demand) of the good. The price will depend on the magnitude of the shifts in supply and demand, but it is not possible to determine with certainty whether it will increase or decrease.

Question 7

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

Accepted Answer

When both the equilibrium price and quantity rise, it means that both the demand and supply for the particular product have increased. However, the shift in demand must have been greater than the shift in supply, causing the equilibrium price and quantity to increase.

Question 8

"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 is the "invisible hand" referred to in this statement?

Accepted Answer

The "invisible hand" in this statement refers to the way in which market prices and the accompanying incentive structure guide producers to unintentionally promote the overall welfare of society. In this case, the producer's pursuit of personal gain leads them to produce goods that meet the needs and wants of consumers, even though their intention may have been solely focused on profit.

Question 9

According to Adam Smith's invisible hand principle, productive actions that promote the general welfare of society will be undertaken when

Accepted Answer

Adam Smith's invisible hand principle states that market forces and competition will direct self-interested individuals to undertake productive actions that will ultimately benefit society as a whole. This means that individuals will naturally engage in activities that contribute to economic growth and prosperity, leading to a better overall standard of living for everyone. This principle is based on the idea that individuals acting in their own self-interest will inadvertently promote the greater good without any central planning or direction.

Question 10

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. In a market system, prices are determined by supply and demand, and consumers with higher incomes are able to purchase more goods and services than those with lower incomes. This can lead to income inequality and a less equitable distribution of goods and services. However, prices do play an important role in coordinating economic activity, balancing supply and demand, and sending signals to buyers and sellers to make rational economic decisions.

Question 11

Which of the following is a function performed by market prices?

Accepted Answer

Market prices perform all three functions listed in the options. Market prices communicate information to buyers and sellers about the relative scarcity or abundance of goods and services. Market prices coordinate the decisions of buyers and sellers by balancing supply and demand. Finally, market prices motivate entrepreneurs to produce goods and services that can be sold profitably.

Question 12

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" refers to the idea that when households and firms interact in markets, they are guided by self-interest and competition, which leads them to make decisions that promote the overall well-being of society. This concept is central to his book, The Wealth of Nations.

Question 13

"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" and it refers to the concept of the invisible hand, which suggests that individuals pursuing their own self-interest can unintentionally contribute to the greater good of society as a whole.

Question 14

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 15

According to the invisible hand principle, competitive markets generally

Accepted Answer

The invisible hand principle, as proposed by Adam Smith, states that in a free market, individuals pursuing their self-interest in buying and selling goods and services will lead to the most efficient allocation of resources. This occurs without the need for centralized planning or direction. Competitive markets incentivize individuals to produce and sell goods efficiently, while also satisfying consumer demand. Therefore, the self-interest of individuals is brought into harmony with the efficient allocation of resources, resulting in overall economic welfare.

Question 16

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

Accepted Answer

The invisible hand concept, developed by economist Adam Smith, suggests that in a market setting, individuals will pursue their own self-interests but in doing so, they will promote the broader interests of society as a whole. Smith argued that by seeking to maximize their own profits or benefits, individuals will produce goods and services that are in demand, driving down prices and making them more accessible to a wider range of people. This competition also encourages efficiency and innovation, leading to economic growth and higher living standards overall. Therefore, option C is the correct choice as it accurately describes the invisible hand concept.

Question 17

Adam Smith's invisible hand principle stresses

Accepted Answer

Adam Smith's invisible hand principle emphasizes that the competitive market process directs self-interested individuals into activities that promote the economic welfare of society, even though their intentions could be entirely selfish. It implies that the market forces ensure that resources are used to produce the most valuable goods efficiently.

Question 18

The invisible hand principle, as developed by Adam Smith in The Wealth of Nations, states that

Accepted Answer

The invisible hand principle developed by Adam Smith in The Wealth of Nations states that in a competitive market, individual self-interest will lead to the public interest being served. This means that by pursuing their own interests, individuals will inadvertently contribute to the overall welfare of society. This is because in a competitive market, prices are determined by supply and demand, and as individuals pursue their own interests, they will operate in such a way as to respond to the wants and needs of others, leading to the most efficient allocation of resources.

Question 19

Prices direct economic activity in a market economy by

Accepted Answer

Prices in a market economy play a crucial role in influencing the decisions of both buyers and sellers. When prices of a good or service increase, consumers tend to demand less of it, while producers tend to increase the supply of it. This mechanism helps to allocate resources efficiently and signals to producers which goods and services are in demand. Therefore, prices serve as important incentives for economic activity in a market economy.

Question 20

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

Accepted Answer

The invisible hand concept refers to the unintended social benefits resulting from individual actions. According to this concept, when individuals pursue their own self-interest, they inadvertently contribute to the overall good of society. Market competition and the pricing mechanism guide individuals towards making decisions that promote greater economic efficiency and prosperity. Therefore, the major implication of the invisible hand concept is that self-interested individuals, when directed by competitive market prices, will tend to promote overall economic prosperity. Option B is incorrect because changing the selfish nature of individuals is beyond the scope of the invisible hand concept. Option C is incorrect because competition is considered essential for economic growth and efficiency. Option D is incorrect because the general consensus is that private sector firms tend to be more efficient than government-operated firms.

Quiz 3: B : Supply, Demand, and the Market Process