If you can decrease the cost by which you provide a good or service, you
can increase the supply. This thereby decreases the price, which
presumably increases consumption. If you increase consumption, you
increase your trade and market share.
What we see is simple economic principles at work; it has nothing to do
with Protestantism. By looking at China we see that they realized if
you can supply abundant and cheap labor, you can increase the supply
of goods and China and their firms are able to decrease their prices
and supply to the Wal Marts of the world.
The Price Function: demand and supply intercept at equilibrium giving
us the optimal price.
Principles of the Market Economy
1. Assuming demand is constant, consumption is a function of price – the
lower the price the better. (Going shopping in Buffalo)
2. An increase in supply decreases price, which should lead to an increase in
consumption. (The Wal-Mart effect)
3. A decrease in supply increases price and therefore decreases consumption.
(Look at the energy sector. What determines the price of oil is the supply of it.
If there is less oil, the price goes up, and we consume less of it.)
- If there is a change in supply then there is a change in price. Trying to get
rich requires manipulating supply.
Adam Smith “The Wealth of Nations” (1776)
The invisible hand of the market is natural and free from interference.
There are some consequences to this theory:
As a country you take advantage of your comparative or absolute
advantages. E.g. if you’re good at making wine and not at textiles,
you’ll capitalize on wine production.
The invisible hand means that countries should focus on what they’re
good at, but this leads to specialization. Each economy specializes at
what they are good at. E.g. pharmaceutical drugs It costs about 500
million dollars to manufacture a new drug. The research and
development probably took place in the U.S, the testing probably took
place in Asia or South America, the manufacturing probably took place
in the U.S, the financing probably happened in the UK or the US or
Hong Kong, the packaging probably happened in China, etc. etc.
Productive efficiency. As long as we specialize at what we’re good at, we
will be efficient and the world will end up divided by specialization