MARKET CLEARING PRICE: How To Find Market Clearing Price(+Detailed Guide)

Market Clearing Price

Price fluctuations have distinct effects on consumers and producers. Higher prices tend to reduce demand while increasing supply and lower prices tend to stimulate demand while discouraging supply. As a result, according to economic theory, the price of something will move toward a point where the quantity requested equals the quantity supplied. We refer to this price as the market-clearing price because it “clears away” any excess supply or excess demand. So, in this article, we’ll see in detail more about the market-clearing price with some examples, how to find it and how to interpret the market-clearing price graph

What Is the Market Clearing Price?

A market-clearing price, also known as the equilibrium price, is the price of an item or service at which the quantity supplied equals the quantity sought. According to the hypothesis, markets tend to gravitate toward this price.

If the amount wanted exceeds the quantity supplied, the market price of the commodity rises, causing the quantity demanded to fall until it equals the quantity supplied. When the amount demanded is less than the quantity supplied, the market price falls and the quantity demanded rises to meet the quantity supplied (through a downward movement on the demand curve).

Market clearing is based on the well-known supply and demand law. When the price of a good rises, customers demand less of it while more supply enters the market. If the price is too high, supply will exceed demand, leaving manufacturers with a surplus. When the price of a good falls, customers demand more of it, and less supply enters the market. If the price is too low, demand will outstrip supply, and some consumers will be unable to receive as much as they would want at that price—this is what we mean when we say supply is rationed…

How To Find the Market Clearing Price

This is the point at which the market has reached equilibrium. It can be calculated by plotting the supply and demand curves and locating the point of intersection. It can also be determined by solving the supply and demand equations.

The market-clearing price is the price at which the market is balanced. Because the quantity of demand and the quantity of supply are equal at the market-clearing price, there is no shortage nor surplus in the market. This implies that neither buyers nor sellers will want to change the price, which is the primary condition for equilibrium.

We know that equilibrium is the place where the supply and demand curves intersect or the point where buyers want to buy the same amount that sellers want to sell. Let’s take a closer look at how to find the equilibrium point using the four-step process. These steps explain how to first, draw the demand and supply curves on a market-clearing price graph and find the equilibrium. Next, consider how an economic change (e.g. a natural disaster, a change in production technology, a change in tastes and preferences, income, etc.) might affect supply or demand, then make adjustments to the graph to identify the new equilibrium point.

Steps To Find the Market Clearing Price

Step #1. Draw your demand and supply curves

Draw demand and supply curves showing the market before the economic change took place. Think about the shift variables for demand and the shift variables for supply. Using this diagram, find the initial equilibrium values for price and quantity.

Step #2. Figure out whether the economic change affects demand and supply

Decide whether the economic change under analysis affects demand or supply. In other words, does the event refer to something in the list of demand shift variables or supply shift variables?

Step #3 Determine the effect of change

Determine whether the effect on demand or supply causes the curve to shift to the right or the left, and sketch the new demand or supply curve on the diagram. In other words, does the event increase or decrease the amount consumers want to buy or the amount producers want to sell?

Step #4. Identify new equilibrium

Identify the new equilibrium, and then compare the original equilibrium price and quantity to the new equilibrium price and quantity.

Market Clearing Price Graph

Because the graphs for demand and supply curves both have a price on the vertical axis and quantity on the horizontal axis, the demand curve and supply curve for a particular good or service can appear on the same graph. Together, demand and supply define the price and the amount that will be bought and sold in a market.

Market-clearing price is a common, non-technical word for equilibrium pricing. In a market graph, the market-clearing price is located at the intersection of the demand curve and the supply curve. The market-clearing price is the price at which the market is balanced.

Market Clearing Price graph Source: Khan Academy

The demand curve, D, and the supply curve, S, intersect at the equilibrium point E, with an equilibrium price of 1.4 dollars and an equilibrium quantity of 600. The equilibrium is the only price when the amount demanded is equal to the quantity supplied. At a price above equilibrium, like 1.8 dollars, the quantity provided exceeds the quantity required, hence there is excess supply. At a price below equilibrium, such as 1.2 dollars, the quantity sought exceeds the amount supplied, hence there is excess demand.

Examples of Market Clearing Price

Prices tend to move toward market-clearing levels as a result of market competition. When there is surplus demand, purchasers compete more fiercely with one another for the amount available. If there isn’t enough of a product to go around for everyone to buy whatever they want at their preferred price, some individuals will voluntarily pay more, pushing the price higher. When the price rises, two things happen:

  1. Some purchasers withdraw, and the quantity demanded falls.
  2. Some manufacturers produce more, and the quantity supplied rises.

So we’ll be looking at two examples of the market-clearing price.

Example #1

Company A sells sun shades. During the summer, there is a high demand and an equal supply. As a result, the markets have reached equilibrium. After the summer season, supply will begin to decline, while demand may remain stable. Company A will raise prices to take advantage of and manage the demand. Once prices are high, demand will gradually fall, putting the markets back into balance.

Example #2

When a retail store has an excess of a particular product that is not being sold at its regular price (for example, unsold summer clothing as the colder season approaches), the store will typically discount the price until the excess stock is sold, which is a simple example of “market clearing.”

Now we’ve seen these examples, let’s see how the government can affect the market-clearing price.

Influence of the Government on the Market-Clearing Price

The COVID-19 situation has financially impacted many consumers and producers: farmers have surpluses, consumers have lost jobs, and students have lost access to meals previously provided in school cafeterias. With so many individuals affected by the crisis, people naturally turn to the government for assistance.

The government largely recognizes the benefit of the free market is largely by government officials. However, the government does occasionally meddle in the market. The government may decide that something is harmful to citizens and levy a tax to discourage purchasers. Alternatively, the government may intervene if it considers that a product or service is so important that everyone should be able to obtain it at a low cost. When people ask for assistance, many policymakers think that anything you can lose in the free market trade is worth the benefits they hope to obtain.

Government policymakers, like consumers and producers, have the ability to influence prices and production. Consumers and manufacturers use market bargaining to agree on pricing and quantity. Meanwhile, the government has an external influence on the market by enacting rules that alter buyer-seller interactions.

At the national, state, and even municipal levels, the government wields enormous power on demand, supply, prices, resources, and output.

Summary

Producers and consumers both support each other by purchasing and selling in markets in a pleasant manner. The amounts required are determined by consumers, and the amounts provided are determined by producers. The meeting point of consumers and producers determines the market-clearing price and generates equilibrium.

Price controls aim at assisting specific groups by utilizing government action. These organizations think that their necessity justifies bending market agreements in their favor. However, while price controls frequently have beneficial, intended results, they also have negative, unforeseen implications that must constantly be considered.

FAQs On Market Clearing Price

What Happens If the Price Drops Below the Clearing Price in the Market?

This is usually what many buyers want to occur. When this happens, buyers will buy up all available items if the price falls below the market clearing price, resulting in a market scarcity. As a result of the scarcity, prices rise until they reach the equilibrium price.

Why is equilibrium price called market-clearing price?

The equilibrium price is also known as the market-clearing price because, at this price, consumers will buy the exact quantity that producers bring to the market.

How do you find the market clearing price?

What Method Do You Use to Determine the Market Clearing Price?
Price discovery is the means through which we arrive at market-clearing prices. Generally, buyers and sellers try to find the price most suitable to purchase. In the cause of bargaining prices, the market falls to equilibrium. 

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