Which of the following correctly describes the role of the ‘Invisible Hand’ in a perfectly competitive market?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → It raises the price when there is excess demand and lowers it when there is excess supply
The ‘Invisible Hand’ is the idea, from Adam Smith, that in a perfectly competitive market the price changes by itself whenever demand and supply do not match. It raises the price under excess demand and lowers it under excess supply, until the market reaches equilibrium.
No government control is involved.
NCERT (2026-27): “Out-of-equilibrium Behaviour From the time of Adam Smith (1723-1790), it has been maintained that in a perfectly competitive market an ‘Invisible Hand’ is at play which changes price whenever there is imbalance in the market. Our intuition also tells us that this ‘Invisible Hand’ should raise the prices in case of ‘excess demand’ and lower the prices in case of ‘excess supply’. Throughout our analysis we shall maintain that the ‘Invisible Hand’ plays this very important role. Moreover, we shall take it that the ‘Invisible Hand’ by following this process is able to reach the equilibrium. This assumption will be taken to hold in all that we discuss in the text.” |