Question

In a perfectly competitive market, whenever there is imbalance in the market, the prices are adjusted by the ________.

• A. Equilibrium Price
• B. Equilibrium Quantity
• C. Invisible Hand
• D. Market Equilibrium

Hint:

Adam Smith's “Invisible Hand” refers to the uncoordinated price mechanism that automatically resolves shortages and surpluses in competitive markets.

Answer 1

The Correct Option is C

Concept:
Market clearance under perfect competition occurs through decentralized interactions between self-interested buyers and sellers.
When the market experiences disequilibrium (excess supply or excess demand), automated price adjustments restore stability.

Step 1: The Principle of the Invisible Hand:
Adam Smith introduced the famous metaphor of the “Invisible Hand” in classical economics.
It describes how spontaneous market price mechanisms operate without central administration:
- In the presence of excess demand, buyers bid prices up until demand contracts and supply expands.
- In the presence of excess supply, sellers lower prices until the surplus is fully eliminated.
This self-correcting price mechanism driving the market back toward equilibrium is known as the invisible hand.

Step 2: Distinguishing Alternatives:
- Equilibrium price and equilibrium quantity are static outcomes of the adjustment process, not the active adjusting agency.
- Market equilibrium is the resting state achieved after adjustments conclude.
Final Answer:
The market price imbalances are corrected by the mechanism of the Invisible Hand. Hence, option (C) is correct.