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Invisible Hand - Market Forces

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sdfIf only the market forces are allowed to act freely, they will by themselves create the optimal prices. There will be no need for administrative price regulations. The "Invisible Hand" will automatically create the reasonable prices to the best for the society. The government should do nothing and leave the economic decisions to the businessmen and the consumers only.

Customers will generally only buy, if the price is low, and the businessmen will only send goods to the market, if they are rewarded with a reasonably high price. After some time a balance will prevail based on these two opposite interests, which is the market price.

Thus in the long run, the market price of a commodity will consist of the costs, which it had caused, and a reasonable profit to the businessman.

This is the beautiful economic model, that we know so well, the increasing supply as a function of the price and the decreasing demand also as a function of the price. Where the two lines intersect each other, they define the market price, represented by a vertical dotted line down to the horizontal price axis.

Independent fishermen in the sixties with small boats If one did not study economics at the university, it's exactly how we perceive the "free market", which is so important for our political views.

However this model applies only to perfect competition, which mainly means, that there are so many suppliers and so many buyers, that they individually cannot influence the price.

The market for vegetables, sold at the morning market of the Gardeners Sales Association, is a typical example of "perfect competition". The market for fish, fresh from the fishermen's boats, is also a good example of "perfect competition".

The individual gardeners or fishermen can meet and talk about the difficult time for their trade. They can drown their sorrow in a glass of beer or a cup of coffee, but they cannot really do anything about it. The prices are controlled by the anonymous market forces, Adam Smith's "invisible hand", that's the way it is.

Family shops in the fifties Many of our parents and grandparents fifty years ago had "their own". There were farms as small as 6 hectares land. There were fishermen with only a few rowing boats using stationary nets in shallow

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