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MONEY BASICS
The evolution of money“By pursuing his
own interests, he
frequently promotes
that of the society
more effectually
than when he really
intends to promote it”
Adam Smith, The Wealth of Nations (1776)The goods have found a price
at which buyers are happy
to continue to purchase. The
“invisible hand” has worked and
the market is now in equilibrium.SELLER A
$3 $3Seller A drops his price slightly
in order to regain customers
and compete with Seller B.Seller B sees she can raise her
price slightly and her goods will
still be in demand.❯❯Market equilbrium When
the amount of certain goods
demanded by buyers matches the
amount supplied by sellers—the
point at which all parties are
satisfied with a good’s price.
❯❯Laissez-faire An economic
theory that holds that the market
will produce the best solutions in
the absence of government
interference. Trade, prices, and
wages do not need to be
regulated, as the market itself will
correct imbalances in them.
❯❯Comparative advantage
The idea that countries should
specialize in those goods they
can produce at the lowest cost.
By avoiding producing goods
in which they do not have a
comparative advantage, countries
will become more efficient and
therefore better off.NEED TO KNOW
PROTECTIONISM AND MERCANTILISM
Adam Smith’s encouragement
of free trade and competition
was at odds with the dominant
economic theories of his time.
Most thinkers supported some
form of protectionism—an
economic policy in which a
government imposes high trade
tariffs in order to protect its
industry from competition. In
Europe at the time this took the
form of mercantilism, which
held that to be strong, a country
must increase its exports and
do everything possible todecrease its imports, as exports
brought money into a country,
while imports enriched foreign
merchants. This theory led to
strict governmental trade
controls—the Navigation Acts
forbade trade between Britain
and its colonies in anything
other than British ships.
Mercantilism began to go out
of fashion in the late 18th
century under the pressure of
new ideas about economic
specialization put forward by
Adam Smith and David Ricardo.SELLER BUS_020-021_Basic_Principles_of_Economics.indd 21 13/10/2016 16:15