Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

What is the term given to describe the price of goods and services when demand and supply become balanced?

1. Equilibrium price

2. Market-clearing price

3. Competitive price

4. Fixed price

The correct answer is: Market-clearing price

The term that describes the price of goods and services when demand and supply become balanced is known as the equilibrium price. This price point represents a state in the market where the quantity of goods that buyers are willing to purchase equals the quantity that sellers are willing to sell. At this point, the market is in a state of balance, and there is no inherent pressure for the price to change because neither surplus nor shortage exists. The concept of equilibrium price is crucial in economics as it helps in understanding how prices are determined in a competitive market. When either demand or supply changes, the equilibrium price will adjust to reflect these changes until a new balance is achieved. This dynamic between demand and supply is fundamental in market analysis and pricing strategy. In contrast, terms like market-clearing price and competitive price might suggest similar scenarios but are not the most accurate descriptors in this context. Market-clearing price often refers to the situation where all goods supplied are sold, while competitive price may imply a price determined by competition among sellers, not necessarily balanced demand and supply. Fixed price refers to a price that does not change regardless of market conditions, which is contrary to the concept of equilibrium.