The correct option is 2 and 3 only.
Explanation
The "Invisible Hand" is a metaphor introduced by Adam Smith in his work The Wealth of Nations (1776). It describes the unseen forces of a free market economy that guide self-interested individuals to contribute to the overall economic well-being of society through the price mechanism.
Statement-wise Analysis:
- Statement 1 is Incorrect. The concept of the Invisible Hand explicitly assumes that market participants are driven by rational self-interest, not altruism. Adam Smith famously noted that it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.
- Statement 2 is Correct. In a competitive market, the Invisible Hand ensures that the independent objectives of consumers (who seek to maximize utility or preference) and firms (who seek to maximize profit) are compatible. At the equilibrium price, the quantity demanded by consumers equals the quantity supplied by firms, harmonizing these opposing interests.
- Statement 3 is Correct. The mechanism operates primarily through price signals. If there is excess demand, prices rise, signaling firms to produce more and consumers to buy less. Conversely, if there is excess supply, prices fall. These signals automatically correct market imbalances without the need for central planning.
Key Takeaway:
The Invisible Hand theory posits that self-interested behavior, guided by the price mechanism in a free market, leads to the efficient allocation of resources and market equilibrium.