Invisible Hand

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Definition of Invisible Hand:

The Invisible Hand is a force that moves an economy to the most efficient use of resources by individuals and businesses acting in their own best interest.

Detailed Explanation:

The invisible hand guides an economy to greater efficiency by allowing producers and consumers to determine what is produced and how much is produced rather than relying on the government to make those decisions on behalf of its citizens.   

Adam Smith developed the idea of an invisible hand guiding the economy. He stated that personal self-interest and market prices act as an invisible hand driving the economy in a direction that promotes the most efficient use of a society’s resources, thereby benefiting the society. The economic forces behind the invisible hand are consumer and producer behaviors as exhibited by the law of demand and the law of supply. There is no coercion. Consumers and producers act in their own self-interest. In The Wealth of Nations, Smith wrote:

Every individual is continually exerting himself to find out the most advantageous employment for whatever capital [income] he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society … He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand [emphasis added] to promote an end which was not part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.
   
The invisible hand guides the producer to produce at the lowest cost possible to maximize profitability. For consumers, the “hand” shows their unwillingness to pay too much for a product and leads the consumer to the seller that offers a desired product at the lowest price. The “hand” also provides guidance in producing the optimal quantity of a good or service with the least amount of waste. The invisible hand guides companies to produce more of a good or service if consumers are willing to pay a higher price. 

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