Invisible hand
Definition. The invisible hand is the idea, associated with Adam Smith, that when individuals and firms pursue their own self interest in competitive markets, the price mechanism coordinates their decisions and tends to allocate resources efficiently, as if guided by an unseen force, without any central planner directing the outcome.
Through changing prices acting as signals and incentives, self interested buying and selling can promote allocative efficiency. The result breaks down where market failure, such as externalities or market power, distorts these price signals.
This term belongs to The Price Mechanism and Its Functions in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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