Study Guide

The Wealth of Nations Book I, Chapter 7

By Adam Smith

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Book I, Chapter 7

Of the Natural and Market Price of Commodities

  • In any country, province, or town, there tends to be an average wage that people of a certain job make for their work. This is what you would call the market price of labor. And for Smith, this average wage works the same way for the prices of products, and it's all determined by the laws of supply and demand. The same forces control the price of rent.
  • Smith refers to these average rates of wage, rent, and profit as the "natural" rates.
  • The two main things you have to consider when looking at the price of labor or products are 1) the supply and 2) the demand. These two things always control how much stuff costs.
  • For example, if you have tons of chips to sell but nobody wants them, you have high supply and low demand. So the price of the chips will be low because people don't want them all that badly. But if a bunch of people decide they want some chips, the price will start to go up. And if your supply of chips runs out while people's demand goes up, then the price will go even higher because people will be desperate to buy one of those last bags of chips.
  • Whenever the price of a product is a direct reflection of how much people actually want the thing, then that's what Adam Smith calls the natural price of that product.
  • If there's only one person who makes that product though, they have a monopoly and they can manipulate the supply of the product in order to make the price whatever they want it to be. That's when the nominal (money) price starts to get away from the natural price.
  • The same forces are what control people's wages. When there's a sudden boom in business, a company has to expand and it needs new workers to do so. So as its demand increases, it pays more money to attract the workers it needs. That's why you hear about regular people making tons of money in places where a company has suddenly found oil.
  • For Smith, there are all kinds of things that can make the nominal price of a product higher or lower than its natural price. But over the long run, he thinks that prices tend to hover around the "natural price."

The Wealth of Nations Book I, Chapter 7 Study Group

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