National Occupational Competency Testing Institute (NOCTI) Business Practice Exam

What economic principle explains the relationship between supply and demand?

1. Price levels

2. Price elasticity

3. Market equilibrium

4. Market segmentation

The correct answer is: Market equilibrium

Market equilibrium is the economic principle that describes the state where supply and demand balance each other, resulting in stable prices. At this point, the quantity of goods that consumers are willing to buy equals the quantity that producers are willing to sell. When supply exceeds demand, prices tend to decrease, which encourages demand and discourages supply until equilibrium is reached. Conversely, if demand exceeds supply, prices tend to rise, incentivizing greater production while discouraging consumption until the market finds balance again. This interplay illustrates how supply and demand interact to determine the price and quantity of goods in a market, making market equilibrium a fundamental concept in understanding economic dynamics. While the other options, such as price levels and price elasticity, have relevance in discussing market behavior, they do not directly encapsulate the overall relationship between supply and demand like market equilibrium does. Market segmentation pertains to dividing a market into distinct groups of buyers, which is more about targeting customers than explaining supply and demand interactions.