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October 21, 2017 

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ASSUMPTIONS, KEYNESIAN ECONOMICS: The macroeconomic study of Keynesian economics relies on three key assumptions--rigid prices, effective demand, and savings-investment determinants. First, rigid or inflexible prices prevent some markets from achieving equilibrium in the short run. Second, effective demand means that consumption expenditures are based on actual income, not full employment or equilibrium income. Lastly, important savings and investment determinants include income, expectations, and other influences beyond the interest rate. These three assumptions imply that the economy can achieve a short-run equilibrium at less than full-employment production.

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MARKET CLEARING:

A condition of the market in which the quantity demanded is equal to the quantity supplied, such that the market is "clear" of any shortage or surplus. Market clearing is a common, non-technical term for equilibrium. In a market graph, the market clearing is found at the intersection of the demand curve and the supply curve.
Market clearing is achieved when the market is in balance, the quantity that buyers want to buy is equal to the quantity that sellers want to sell. Because quantity demanded and quantity supplied are equal, there is no shortage nor surplus in the market, which means that neither buyers nor sellers are inclined to change the price, which is the primary condition for equilibrium.

Market clearing is also characterized by equality between the demand price and supply price. This equality generates an efficient allocation of resources (presuming competition and no market failures).

In common everyday use, market clearing is the common everyday term for market equilibrium. When Aunt Rita, for example, talks about the market-clearing price of gold bullion on the Swiss exchange, she is referring to the price that achieves an equilibrium balance between quantity demanded and quantity supplied.

Clearing the Market

Market Clearing
The market model displayed in the exhibit to the right can be used to identify the market clearing. This particular model represents the market for 8-track tapes, which are filled with the wonderful works of classic performers such as The Carpenters and Englebert Humperdink. The buyers and sellers happen to be folks attending the 88th Annual Trackmania 8-Track Tape Collectors Convention at the Shady Valley Exposition Center.

Market clearing achieves a balance in the market, which is equality between quantity demanded and quantity supplied. In other words, it clears the market of any shortage or surplus. This is accomplished at the intersection of the demand curve and supply curve. This intersection point can be identified by clicking the [Market Clearing] button in the exhibit.

Doing so reveals that the market is cleared at a price of 50 cents. At this price, the demand curve and supply curve intersect. The quantity demanded is 400 tapes and the quantity supplied is 400 tapes. The quantity demanded is equal to the quantity supplied. The buyers can buy all that they want, so there is no shortage. The sellers can sell all that they want, so there is no surplus. Neither buyers nor sellers are motivated to change the price. The forces of demand and supply are in balance.

This is the ONLY price that achieves a balance between these two quantities. Best of all, because this is equilibrium, the price of 50 cents will not change and the quantity of 400 tapes will not change unless or until an external force intervenes.

<= MARKET ADJUSTMENTMARKET-CLEARING PRICE =>


Recommended Citation:

MARKET CLEARING, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2017. [Accessed: October 21, 2017].


Check Out These Related Terms...

     | market equilibrium | market-clearing price | equilibrium quantity | equilibrium price | equilibrium | market equilibrium, numerical analysis | market equilibrium, graphical analysis | disequilibrium price | shortage | surplus |


Or For A Little Background...

     | demand price | supply price | demand curve | supply curve | market | demand | supply | quantity demanded | quantity supplied | law of demand | law of supply |


And For Further Study...

     | stable equilibrium | unstable equilibrium | market disequilibrium | self correction, market | comparative statics | market demand | market supply | exchange | competitive market | demand determinants | supply determinants | ceteris paribus | market-oriented economy | efficiency | elasticity | utility analysis | short-run production analysis |


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