How does the concept of the 'invisible hand' support the idea that people respond to incentives?

• A. It argues that government intervention is necessary to ensure that people respond to incentives.
• B. It claims that incentives have no effect on individual decision-making in markets.
• C. It states that only businesses, not consumers, respond to incentives in the marketplace.
• D. It suggests that individuals pursuing their own self-interest, guided by incentives, can unintentionally promote the overall economic well-being of society.

Answer: (D)

Verified step by step guidance

1. Understand the concept of the 'invisible hand' as introduced by Adam Smith, which describes how individuals acting in their own self-interest can lead to positive outcomes for society as a whole, even if that was not their intention.
2. Recognize that incentives are crucial in this process because they motivate individuals to make decisions that benefit themselves, such as producing goods, offering services, or purchasing products.
3. Analyze how, when individuals respond to these incentives, their actions collectively coordinate through the market mechanism, leading to efficient allocation of resources without the need for central planning.
4. Note that the 'invisible hand' does not imply that government intervention is always necessary; rather, it highlights how decentralized decision-making driven by incentives can promote economic well-being.
5. Conclude that the concept supports the idea that both consumers and businesses respond to incentives, and through their self-interested actions, they contribute to the overall functioning and prosperity of the economy.