Economics Theories and Consumer Behaviors

Essay Questions #3
Name
Professor
Term
Institution
1 What is Adam Smith’s invisible hand idea all about?
It is all about economics, particularly the invisible force that tries to establish an equilibrium in the market through the concept of free will amongst the actions of self-interested players therein. Looking at it deeply, it is simply a metaphor stating that if an individual minds his own business quite literally by doing what brings him profits, then by extension, he might be benefitting others in that market as well. In other terms, the ‘invisible hand’ will have the person pushing himself more and more to increase his returns, without realizing that this also positively benefits the larger economy.
2 Why is there a spontaneous order that comes out of the pricing system (according to Smith)?
The spontaneous order usually comes as a result of the free will of the players in the market rather than the set systems or policies of the government. As Smith notes, the increase or decrease in prices usually follows a natural order that is only subject to adjustments based on the information presently available. According to him, the stock is never overpriced or underpriced since it simply acts in response to the available information. This means that in the long run, the price of a given stock will always play around the equilibrium, as it self-adjusts accordingly with the prevailing information.
3 Why did Smith think that banking needed to be regulated?
Banks need to be regulated so as to reduce the risk involved when they end up giving unworthy borrowers too much of their promissory notes. There is always the existing threat of these financial institutions being left hanging on a thread in case depositors make withdrawals while they have already lent out to defaulters. It might place these banks at risk of collapse. Even though this might be taken as a violation of the existing financial rules, regulation remains the best way to protect the same banks.
4 How does general equilibrium theory support the idea of the invisible hand?
From the readings, equilibrium is a product of non-intervention by the government and usually happens when the market itself generates and allocates resources for itself. It also asserts that the markets are quite efficient, meaning that enterprises always have a look at how the prices go hand in hand with the available goods. The market dynamics, such as production, supply, demand, and consumer behavior, would mean that there will always be adjustments and readjustments in the market around the equilibrium. This aligns with Smith’s ‘invisible hand’ perspective, where all these individual dynamics positively impact the larger market.
5 What did later researchers (from the 1970s) find out about general equilibrium theory?
According to general equilibrium, there is supposed to be some order established by the price system. Drawing from the reading, later researchers realized that the general equilibrium theory is not as rigid or abstract as initially thought. The government doesn’t really have absolute control when it comes to tackling the market ‘chaos.’ The outcomes of the economic equations yielded so many poss...