The Balance of Industries and Creative Destruction
Why are price signals and market competition so important to a market economy? When prices accurately signal costs and benefits and markets are competitive, the
Why are price signals and market competition so important to a market economy? When prices accurately signal costs and benefits and markets are competitive, the Invisible Hand ensures that costs are minimized and production is maximized. If these conditions aren’t met, market inefficiencies arise and the Invisible Hand cannot do its work. In this video, we show how two major processes, creative destruction and the elimination principle, work with the Invisible Hand to create a competitive marketplace that works for producers and consumers.
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If profits across ALL industries are balanced and above normal profits are only temporary, how come certain industries have historically been much more profitable than others?
Remember that we are discussing competitive industries. If some industries aren't competitive then profits will be higher in those industries and they will stay high. In such a case, we do not get a balance across industries and in fact we will get too few resources in the highly profitable industry.