The Invisible Hand: How Markets Work
Conclusion & Summary


If you understand this chapter, then you understand why Adam Smith spoke of an "invisible hand" and how Alfred Marshall made it visible in graphs. You understand the basic theory of markets: the basic mechanics of how a market (any market) works. You also understand some of the historical and normative arguments economists make on behalf of markets, and some of the counterarguments raised by their heterodox critics. It's good start in the economic conversation. You've just had a short but solid course in "microeconomics."


1. Markets are all around us and we are operating in many of them.

2. Open markets like the Chicago Board of Trade serve as a model for all markets. When we speak of a "market" however, we are usually not referring to a single place. We are referring instead to a group of people who are buying and selling something."

3. Every market has a demand side and a supply side. A market requires a means of payment - usually money - and the exchange of commodities at a particular price.

4. Markets provide goods and services more conveniently and more efficiently than they can be provided in the home. Buyers and sellers in a market enter into transactions voluntarily. The market is a way of refereeing who gets what.

5. Markets use the advantage of specialization. The principle of comparative advantage accounts for the advantage of specialization: people (and countries) specialize in those activities in which they have a comparative advantage with respect to other people (or countries).

6. The law of supply declares that the higher the price of a product, the more of it will be supplied. The law of demand declares that the higher the price of a product, the less of it will be demanded.

7. Adjustments in price move the market toward equilibrium - that is, the point at which the supply curve and the demand curve intersect. The demand curve moves out if income increases. The supply curve moves out if technology improves.