The basic principle of economics is supply and demand and the concept of an equilibrium that exists between the two. The supply graph marked by the indicator S describes the quantity (millions of gallons of gasoline) that the firm (Gasoline producer) is willing to supply at a certain price. The demand curve marked by the indicator D describes the quantity that the buyer would purchase at each given price. Intuitively speaking, the higher the price, the more the producer is willing to supply, and the less the customer is willing to buy. The equilibrium price describes the price of the highest efficiency, meaning that the market is operating with no loss. If there is a surplus of goods, goods will be wasted and potential revenue will be lossed. During a shortage, consumers are not getting the goods that they wish to have that can propel overall productivity. Supply and Demand don’t just exist in a goods market, they exist in the labor market where demand describes the number of available jobs, supply is the people looking for jobs, and price is wage.
Here’s where Adam Smith’s concept of the invisible hand comes into play. The invisible hand describes the force that drives the market towards an equilibrium. Because market inefficiency impacts the supplier’s ability to make revenue and hampers the consumer’s ability to attain goods, any shortage will be quickly detected by the supplier, and the prices will rise to equilibrium, and vice versa. Competition will keep prices low and maintain quality, the needs of society will be met, and thus the government does not need to be involved. The political doctrine that facilitated the Gilded Age, Laissez-Faire, was based on this idea of an invisible hand. Laissez-Faire economics rejected the idea of government regulations.
In the 1930s, at the height of the Great Depression, these Laissez-Faire invisible hand doctrines that governed the direction of economic policy had come into question. In its place was John Marynard Keynes theory dubbed Keynesian Economics that stressed government regulation in business practices. This theory would take into account the emergence of large oligopolies that controlled markets and hampered innovation in society that happened due to these large corporations colluding with each other instead of directly competing as it is described in Smith’s theory of economics.