Question

Referring to the concept of an "invisible hand" allocating resources across industries in response to economic profits and losses. that has been growing in response to economic profits. 1. Give an example of an industry shrinking in response to economic losses. 2. Give an example of an industry that has been 3. When large firms/industries suffer economic losses and are at risk of industry received tens of billions from government for help in the form of loans or even bailouts (e.g. the airline plummeted as a result of the the government in mid-2020 to keep them afloat when passenger travel warranted or not? What does it depend on?

Answer 1

The invisible hand concept illustrates how industries adapt to economic profits and losses, with examples like the decline of the coal industry and the growth of renewables. Government interventions, such as bailouts, are context-dependent and aim to prevent economic fallout while encouraging market competition recovery.

Step-by-step explanation:

Adam Smith's concept of the invisible hand suggests that individuals engaged in self-interested behavior in a free market can lead to positive social outcomes, with resources being allocated efficiently across industries. When industries earn economic profits, the invisible hand will guide new firms to enter the market, leading to increased competition and thus, profits will eventually drop to zero in the long run as per the theory of monopolistic competition. Conversely, if an industry is shrinking due to persistent economic losses, firms will exit the market until losses are minimized or eliminated, as seen with the coal industry, which has been declining due to factors like environmental regulations and competition from alternative energy sources.

An example of an industry that has been growing in response to economic profits is the renewable energy sector, particularly solar and wind power, which have seen significant growth due to their comparative advantage in terms of cleaner energy production and lower marginal costs over time. This growth is an application of the law of diminishing marginal utility, as the more we use non-renewable resources, the less utility they provide because of depletion and environmental costs, making renewables more attractive.

During times of economic crisis, such as the COVID-19 pandemic, governments have historically stepped in to provide bailouts to prevent large-scale job losses and economic fallout. For instance, the airline industry received substantial governmental aid to stay afloat when demand for passenger travel plummeted. The justification of such bailouts depends on factors like the potential for long-term recovery, the importance of the industry to the economy, and consideration of whether the support should orient the industry toward future market competition rather than unending government dependencies.