To illustrate what happens when supply and demand work effectively in a market, as described by Adam Smith, you would look for a scenario that highlights the following key concepts:
-
Equilibrium Price and Quantity: The market reaches a point where the quantity of goods supplied equals the quantity of goods demanded. At this point, there is no surplus or shortage.
-
Price Signals: Prices adjust based on changes in supply and demand. If demand increases and supply remains constant, prices rise, signaling producers to supply more. Conversely, if supply increases without a change in demand, prices may fall, signaling consumers to buy more.
-
Incentives for Producers and Consumers: Producers respond to higher prices by increasing production, while consumers may reduce their demand at higher prices, leading to a natural adjustment in the marketplace.
An example scenario illustrating these points could be:
- Scenario: A sudden increase in consumer preference for electric vehicles (EVs) leads to a rise in demand. As demand for EVs increases, manufacturers observe higher sales and raise their prices. This price increase signals other producers to enter the EV market or existing producers to ramp up production. Over time, as more EVs are produced and offered in the market, prices stabilize and eventually the quantity supplied meets the quantity demanded, reaching a new equilibrium.
This illustrates the mechanism of supply and demand working effectively as described in Adam Smith's vision of a self-regulating market.