There are so many definitions of what market clearing price is. According to Wikipedia, A market-clearing price is the price of a good or service at which quantity supplied is equal to quantity demanded, also called the equilibrium price. Therefore, we’ll be looking at how to find market clearing price and formula.
What is Market Clearing Price?
The market clearing price is the cost at which customer demand equals the number of goods that can be manufactured at that price. At this price, supply and demand are exactly in balance. There are no unwanted items waiting to be sold, and no purchasers who are unable to purchase.
What Is the Relationship Between the Equilibrium Prices and the Market Clearing Prices?
The terms “equilibrium prices” and “market clearing prices” are frequently use interchangeably. Both terms refer to the price at which the number of commodities for sale is exactly equal to the amount desired by purchasers. To put it another way, it is the price at which the market is in balance.
Example of a Market Clearing Price
As an example of how clearing prices are determined, consider the stock XYZ, which is traded on a certain stock exchange. The order book reports a daily transaction volume of $1 million on a usual day, with share prices trading in a narrow band between $95 and $100. In other terms, around 10,000 shares are traded each day, and the market is balanced between buyers and sellers.
These, however, are not the only potential deals. Some purchasers may have placed lower-priced orders in expectation of sharp price decreases. In anticipation of a price surge, some sellers would also have open orders for excessively high prices.
Finally, assume a wealthy investor enters the market and decides to spend $1 million on XYZ stock on the open market. This investor would hope to be able to purchase 10,000 shares, however, due to the low supply, this is doubtful. Moreover, the investor would quickly purchase all of the shares priced between $95 and $100 before progressing on to purchase offers costing at $110, $120, or even $200. The clearing prices for XYZ at the end of the trading day could be way greater than it was when the investor entered the market
How to find Market Clearing Price
Prices discovery are use to determine the market clearing prices. Whereby Both purchasers and sellers will try to discover the best prices for their respective interests. Then the market will eventually attain balance at a price where the number of willing buyers equals the number of willing sellers. the above is how to find a market clearing price
What if the prices drop below the market clearing prices?
If the prices goes down below the market clearing prices, purchasers will purchase all available goods, resulting in a market shortage. However, Prices rise as a result of the scarcity until they reach the equilibrium price. Similarly, if prices rise far above market clearing prices, distributors will have an unsold products excess that can only be lowered by reducing prices.
Market clearing price formula
In commodity transactions. Formula market clearing price is a system in which a buyer and seller decide in advance on the price to pay for a future product delivered based on a pre-determined computation. A packer, for instance, might agree to pay a hog producer the average cash market price on the day the hogs are to be delivered, plus a 2-cent per-pound premium.
Such transactions are common in agribusiness, especially for livestock. Moreover, Users feel that formula market clearing prices improve market efficiency and predictability. Nevertheless, as the use of formula market clearing prices becomes more widespread. Fewer animals are sold in cash markets. Where prices are more readily in a report and understood by producers. Some of these producers claim that formula market-clearing prices make it more difficult to assess the genuine market value of their animals. Because of the market-clearing price formula, allows purchasers to manipulate and pay cheaper prices.
Factors that affect market clearing price
Some factors have an ongoing effect on market clearing price. External factors or even competition within the market can exist.
Meanwhile, let’s take a look at some of these factors.
#1. Crisis
During a crisis, a variety of factors influence market equilibrium. However, a crisis can completely destabilize any market. Take Covid 19 as an example; it has influenced the supply and demand for a variety of commodities. Furthermore, a crisis is a planned component that influences the market clearing price.
#2. Competition
Basically, price is affected by competition in every industry.
Because it affects the price, it also affects market equilibrium. Companies employ both low-cost and high-cost pricing strategies. And both techniques disrupt the supply-and-demand equilibrium. Furthermore, the disruption in the supply and demand balance opens the door to further price adjustments. The market clearing price, on the other hand, either falls or rises. The trend will continue until the market reaches equilibrium.
Finally, changes in customer preferences disrupt the equilibrium of supply and demand. That is why businesses are always refining their pricing strategies.
#3. Influence of the Government
The government occasionally intervenes in how the market operates. For example, the government can levy taxes on harmful products such as cigarettes. They use this to deter customers from purchasing the merchandise. This has a direct impact on the products’ market clearing product.
Importance of market clearing prices in petrol
We are continuously concerned about the stability of the fuel markets since we live in a world where the majority of means of transportation rely on oil. The economic foundation of various countries, like Saudi Arabia, Venezuela, and India, is based on oil production and prices, independent of the economic system. These prices, however, affect not only the countries that produce oil but all countries that rely significantly on oil for fuel. The author of the Forbes piece states that “messing with the [petrol] price mechanism is a guaranteed technique of causing economic turmoil.” Rather than creating false prices, the market should determine the price of oil, implying that the market-set price should become the market-clearing price. If the market-clearing prices are not reached, the oil market will experience either shortages or stockpiles of gasoline.
What’s More?
We talked about matching markets and the need of setting market-clearing prices in order to achieve happiness or satisfaction in a specific circumstance in class. The Forbes article elaborates on the scenarios presented in class and in the textbook, emphasizing the significance of market-clearing prices in the global economy. According to the author, fixed petrol prices are the primary cause of Venezuela’s free collapse. Fixing prices below the market-clearing prices improves buyer demand, but it may force some sellers to drop out or produce less in the market because the prices are less than they prefer. This dichotomous process generates a strong demand but a low supply, resulting in unfavorable shortages. Market-clearing prices should be set in order to maximize happiness and achieve a supply-demand equilibrium.
What Factors Impact the Market-clearing Price?
At increasing prices, demand is typically thought to slope downward as buyers make fewer purchases. The market-clearing price—the price at which supply and demand are equal—is represented at the intersection of the two curves. Numerous factors can affect price changes (technology, consumer preference, weather conditions).
What Makes the Market-clearing Price So Crucial?
It aids in achieving supply and demand equilibrium. Additionally, the supply and demand are perfectly balanced at the market clearing price. There is no longer a shortage of commodities as a result. Customers visit the market and find the goods they want.
What Is the Concept of Market Clearing?
It is the process through which a traded good’s supply and demand are equalized, leaving neither surplus supply nor demand. A market-clearing price is one that balances the amounts of supply and demand.
What Leads to an Increase in Market Clearing Price?
Buyers will continue to fight fiercely for the goods in an environment of surplus demand as long as the price is lower than the market-clearing price, driving the price up. Until the market-clearing price is reached, the amount sought declines as the price rises and the amount provided increases.
If the Price Drops Below the Market-clearing Price, What Will Happen?
If the market price is lower than the equilibrium price, there will be a shortage since there will be less supply than there will be in demand. Market clarity is lacking. It’s in low supply. This shortfall will lead market prices to increase.
Conclusion
Market clearing prices are simply the cost at which the demand for goods by a consumer equals the number of goods that can be manufactured at that prices.
Market clearing price FAQ’s
How do you find the market clearing price?
In a market graph, the market-clearing price is found at the intersection of the demand curve and the supply curve. Market-clearing price is the price that achieves a market balance.
What is the difference between equilibrium and market clearing price?
A market-clearing price is the price of a good or service at which quantity supplied is equal to quantity demanded, also called the equilibrium price. The theory claims that markets tend to move toward this price.
What is a synonym for market clearing price?
This price is often called the “‘competitive price “‘ or market clearing price and will tend not to change unless demand or supply changes and the quantity is called ” competitive quantity ” or market clearing quantity.
What is true of a good at a market clearing price?
There is neither a shortage nor a surplus of the good. The quantity of a good demanded is equal to the quantity supplied
