Adam Smith defined self-interest and competition in a market economic situation as the "invisible hand" the guides the economy. This episode of the economic Lowdown Podcast series explains this concepts and their prestige to our expertise of the economic system.

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A market economic situation is an economic system in which people own most of the resources - land, labor, and capital - and control your use v voluntary decisions made in the marketplace. That is a system in i beg your pardon the government plays a little role. In this form of economy, two pressures - self-interest and also competition - beat a really important role. The function of self interest and also competition was described by economist Adam Smith over 200 years ago and quiet serves as foundational to our knowledge of exactly how market economies function.

Self attention is the motivation of financial activity.

Why execute you go to work? Why perform you walk to school? There might be numerous reasons, yet at their main point you most likely go to work and school because you room self-interested. To be self-interested simply method that you look for your own personal gain. You go to work since you want to obtain paid so you can buy the things you want. You go to school so girlfriend can gain a far better job someday and also earn an ext money come buy the things you want. In fact, many of the economic task we see roughly us is the an outcome of self-interested behavior. Adam Smith explained it this way in his book, The riches of Nations:

"It is not from the benevolence (kindness) that the butcher, the brewer, or the baker that we intend our dinner, yet from your regard to their own interest."

So why go the baker choose to bake? The prize is self-interest. The baker wants to earn enough money to feeding his family and buy the things he wants and also the many effective method he has uncovered to execute that is to bake bread for you. In truth his bread needs to be great enough and the company friendly enough that you space willing to give up her money openly in exchange for his bread. The baker while offer his self-interest has created a an excellent that is very valuable to you. The miracle of a market system is that self-interest produces behavior that benefits others.

Is gift self-interested greedy? Is that immoral? if the term self-interest has an adverse connotations, that does not necessarily suggest greedy or not ethical behavior. Self-interest just way that you look for your goals. In fact, your self-interest might lead you come study hard for her math test, offer money to your favorite charity or volunteer in ~ a regional school.

Competition is the regulator of financial activity.

Doesn"t self-interest bring about price gouging, corruption and cheating? periodically it does, however most frequently it is hosted in inspect by competition. Due to the fact that other self-interested civilization are contending in the marketplace, mine self-interest is hosted in check. Because that example, if i were a baker, the only means I would have the ability to earn your dollars is to create bread the is better, cheaper or an ext convenient than the bread produced by the other bakers in town. If i were to rise my price also much, girlfriend would likely buy bread from my competitors. If ns were come treat girlfriend poorly when you get in my store, girlfriend would likely buy from mine competitors. If my bread were moldy or inferior in any kind of way, girlfriend will most likely buy from mine competitors. In order to earn her money i must carry out a high quality good or company at a reasonable price. You will notice that this suspect I have actually competitors. If i were the just baker in 100 miles, ns might have the ability to charge a high price, sell inferior products, or law my client rudely - but even in the case, an additional self-interested person could see an opportunity to earn a profit and also open a competing bakery in town. Thus, competition is the regulator, a examine on self-interest since it restrains my capability to take advantage of mine customers.

The Invisible Hand

Adam Smith defined the opposing, but complementary forces of self-interest and competition as the invisible hand. When producers and consumers space not acting through the will of offer the requirements of rather or society, lock do. When you work, her goal is to knife money, however in the procedure you provide a valuable good or company that benefits others and society. The amazing component of this procedure is that there is very tiny government control. The bread girlfriend buy in ~ the keep arrived together the an outcome of numerous self-interested people cooperating without a government bread agency managing manufacturing at each action along the way. The farmer prospered the grain, the mill prepared the flour, the bakery developed the bread, the truck driver delivered the bread come the grocery store store, the grocer stocked the shelves and sold the loaf to the customer all without a government Secretary that Bread manufacturing telling any of lock what, where, when, or exactly how much to produce. It"s as if they were being guided by one invisible hand that guided sources to their many valued use. In the native of Adam Smith:

"by directing that market in together a manner as its develop may it is in of the best value, the intends only his own gain, and he is in this, as in many other cases, led by one invisible hand to promote an finish which was no part of his intention."


The conversation of self-interest and competition usually results in a discussion of the proper role of federal government regulation. Some view a market economic situation as mostly self-regulating, assuming there are sufficient firms completing in the sector to it is in a inspect on self-interest. Others point to examples of fraud whereby competition has failed to be an adequate inspect on self-interest - they argue that federal government must take a an ext active role regulating economic activity. In fact, much of the fighting among political teams has to perform with the question of just how much government control is needed to regulate the economy.

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To recap, self-interest and competition are really important financial forces. Self-interest is the motivation of financial activity. Vain is the regulator of financial activity. Together they type what Adam Smith called the invisible hand, which guides resources to their most valued use.


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