The price at which market demand will likely equal market supply is called the

• A. Equilibrium price
• B. Market price
• C. Basis
• D. Invoice price

Answer: (A)

Equilibrium price is the price at which market demand equals market supply; it’s the market-clearing price where the quantity buyers want to purchase matches the quantity sellers want to sell. At this point, there’s no inherent pressure for the price to move up or down because the market is balanced. If the price rises above this point, a surplus occurs and sellers tend to lower prices to clear extra inventory. If the price falls below it, a shortage occurs and prices rise to re-establish balance. This balance is found at the intersection of the demand and supply curves, and shifts in either curve will create a new equilibrium. The other terms describe different ideas: market price is simply the current price in the market, basis is the difference between spot and futures prices in some markets, and invoice price is the price stated on an invoice.