Capitalism
SLMS/10
Adam Smith
Three Natural Economic Laws
•Adam
Adam Smith was a professor of economics
at Scotland’s Glasgow University. His work,
Wealth of Nations (1776) is considered the
first work of modern economics.
•As a figure of the Enlightenment, Smith looked for
natural laws -- in this
case, natural laws that
governed economies. His
work became the basis of capitalism.
•The first was the Law of Supply and Demand. Smith believed that supply and demand worked together to set prices.
•He argued that if demand were high, and if
supply was limited, then the
price would go up. Likewise,
if there were a large supply,
and limited demand, the
price would go down.
•Ebay provides a good example of the law
of supply and demand. When a product is
rare or hard to get, the price is often very
high. When products are common, the price
is low.
•The second was the Law of Competition.
Smith believed that the competition to create products yielded a better quality and a
cheaper priced product for consumers.
•If there were no competition in the creation
of a specific product, there would be no reason to focus on creating a quality product.
Price could remain high, regardless of quality, because there would be no substitutes.
The one company creating the product
would have a monopoly and could charge
whatever they wanted.
•The third was the Law of Self
Self--Interest. This
is also known as “profit motive”, and it suggests that
people act in their own financial best interest.
•Basically, people start their
own businesses because they
seek profits for themselves.
They develop businesses to meet a need (or
demand) for a product in the economy. This
self-interest ensured that there would be
ample competition in the market place.
Aspects of Capitalism
•A capitalist economy is known as a free
market economy because private citizens
own the Means of Production (businesses,
agriculture, transportation, communication),
and compete for profits without restriction.
•Smith actually advocated a Laissez
Laissez--faire
capitalist system. Laissez-faire was the idea
that government should not
interfere with the economy.
He argued that the three
natural laws acted as a sort
of invisible hand, guiding the
economy. It was unnecessary
for government to either aid
or hamper businesses.
•A capitalist economy typically yields a
huge number of products and a wide variety
of prices. It also is very consumer-oriented,
or focused on the needs of the consumer.
•It should be noted that completely unregulated capitalism (laissez-faire) creates terrible greed, selfishness and abuse. It was this
unregulated capitalism that led to many of
the labor abuses early in the Industrial
Revolution. Humanity is at core, selfish.
Global History
Capitalism
1. Who was Adam Smith?
2. What was Smith’s contribution to history?
Name _____________________________________
7. What did Smith say happened when there
was no competition?
8. What is behind the Law of Self-Interest?
3. What did the Law of Supply and Demand
do?
9.Why does this law help ensure competition
in the economy?
4. How did this law work?
10. Define: Means of Production --
11. Why is capitalism known as a free market
economy?
5. Give your own example of Supply and Demand in action.
12. What is laissez-faire capitalism?
6. What is the idea behind the Law of Competition?
13. What are the advantages and disadvantages of capitalism?
Global History
Capitalism Key
Name _____________________________________
1. Who was Adam Smith?
Price could remain high, regardless of qualA professor of economics at Scotland’s Glas- ity, because there would be no substitutes.
The one company creating the product would
gow University
have a monopoly and could charge whatever
they wanted.
2. What was Smith’s contribution to history?
His work, Wealth of Nations (1776) is consid- 8. What is behind the Law of Self-Interest?
ered the first work of modern economics. His Also known as “profit motive”, and it sugwork became the basis of capitalism.
gests that people act in their own financial
best interest.
3. What did the Law of Supply and Demand
9.Why does this law help ensure competition
do?
Smith believed that supply and demand
in the economy?
People start their own businesses because
worked together to set prices.
they seek profits for themselves. They de4. How did this law work?
velop businesses to meet a need, and this enHe argued that if demand were high, and if
sured that there would be ample competition
supply was limited, then the price would go in the market place.
up. Likewise, if there were a large supply, and
limited demand, the price would go down.
10. Define: Means of Production -- all the
businesses, agriculture, transportation &
5. Give your own example of Supply and De- communication systems
mand in action.
Answers will vary. A good example is always 11. Why is capitalism known as a free market
that hot toy at Christmas time (THE toy var- economy?
ies from year to year), or video gaming plat- Because private citizens own the Means of
forms. These are purchased at one price, then Production and compete for profits without
placed on ebay for a higher price because
restriction.
they are scarce and in high demand.
12. What is laissez-faire capitalism?
6. What is the idea behind the Law of Com- Laissez-faire was the idea that government
petition?
should not interfere with the economy.
Smith believed that the competition to create products yielded a better quality and a
13. What are the advantages and disadvantages of capitalism?
cheaper priced product for consumers.
A capitalist economy typically yields a huge
7. What did Smith say happened when there number of products and a wide variety of
was no competition?
prices. It also is very consumer-oriented, or
If there were no competition in the creation focused on the needs of the consumer. Unof a specific product, there would be no rea- regulated capitalism (laissez-faire) creates
terrible greed, selfishness and abuse.
son to focus on creating a quality product.
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