Economic science knows a few basic directions of economic thought, arranged in chronological order as follows: School of mercantilism, classical ekonomteoriya (principle of the invisible hand of Adam Smith), the school of the Physiocrats, neoclassical, Marxist school, Keynesianism and monetarism.
Among these economic schools occupy a special place classics, especially Adam Smith with his "research Wealth of Nations".It was his work laid the foundation of modern economics as a science, it was he who first brought the patterns of interaction of the major forces in the market, as supply and demand.Smith was also substantiated the principle of the invisible hand.
To better understand how this principle works, you must understand the meaning of the laws of supply and demand, issuance Smith.According to the law of demand, customers will gain a greater quantity of goods at a lower cost, and fewer goods at a higher price.Graphically this can be shown as a decreasing straight line whose slope is determined by the elasticity of demand, ie the degree of response to changes in consumer prices.The elasticity of demand may be zero (consumers purchasing the same amount of goods regardless of changes in the price level), lower (price change by one percent will trigger changes in demand by less than one percent), and more units (a one percent price change will change the level of demand overone percent).
works similarly law proposal, according to which the manufacturer will sell more products at higher prices, and less goods at a lower.Graphically, it is possible to show an increasing straight line whose slope is determined by the degree of price elasticity of demand.
invisible hand principle states that the market equilibrium is established at the intersection of supply and demand, while it will be achieved automatically by the action of consumers and sellers in the market.Thus, Smith rejects the need for government interference in the economy as detrimental to economic development and an instrument of market processes.According to his statements, during a period of buyers and sellers will change the point on its supply and demand curves, respectively, by changing the price and the number of buy and sell goods, until they reach the point of equilibrium, and then begin to steadily carry out transactions on purchase and sale of equilibrium quantityProduct of the equilibrium price.
Unfortunately, the principle of the invisible hand of the market, although it is theoretically absolutely correct and justified, is not supported in the current economic realities.This stems from the fact that this principle works only in conditions of perfect competition, which is in fact purely theoretical model in which the market operates an infinite number of buyers and sellers, and to buy and sell absolutely homogeneous product.In real life, the achievement of such conditions is impossible in principle, therefore, the principle of the invisible hand is not suitable for use in the modern economy.In contrast to Smith's theory was developed the theory of John Maynard Keynes and monetarists, allowing state regulation of the economy.Keynesianism said major regulatory power of the state budget expenses, which increase multiplicative increases aggregate demand, but the monetarists prefer to regulate the economy through control of the money supply in the country.
spite of this, the principle of the invisible hand - is an important theoretical developments, and understanding opens up opportunities to study economics analysis of the markets, taking into account the current economic realities.
