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Market Clearing Price

Market Clearing Price. (Balance in the Market) . When the supply and demand curves intersect, the market is in equilibrium. This is where the quantity demanded and quantity supplied are equal.

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Market Clearing Price

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  1. Market Clearing Price (Balance in the Market)

  2. When the supply and demand curves intersect, the market is in equilibrium. This is where the quantity demanded and quantity supplied are equal. • The corresponding price is the equilibrium price or market-clearing price, the quantity is the equilibrium quantity.

  3. Putting the supply and demand curves together. These two curves will intersect at Price = $6, and Quantity = 20. In this market, the equilibrium price is $6 per unit, and equilibrium quantity is 20 units. At this price level, market is in equilibrium. Quantity supplied is equal to quantity demanded ( Qs = Qd). Market is clear.

  4. Surplus and shortage: • If the market price is above the equilibrium price, quantity supplied is greater than quantity demanded, creating a surplus. Market price will fall. • So what usually happens?

  5. If the market price is below the equilibrium price, quantity supplied is less than quantity demanded, creating a shortage. • The market is not clear. It is in shortage. Market price will rise because of this shortage.

  6. If a surplus exist, price must fall in order to entice additional quantity demanded and reduce quantity supplied until the surplus is eliminated. • If a shortage exists, price must rise in order to entice additional supply and reduce quantity demanded until the shortage is eliminated.

  7. If the market price (P) is higher than $6 (where Qd = Qs), for example, P=8, Qs=30, and Qd=10. Since Qs>Qd, there are excess quantity supplied in the market, the market is not clear. Market is in surplus. THE PRICE WILL DROP BECAUSE OF THIS SURPLUS.

  8. If the market price is lower than equilibrium price, $6, for example, P=4, Qs=10, and Qd=30. Since Qs<Qd, There are excess quantity demanded in the market. Market is not clear. Market is in shortage. THE PRICE WILL RISE DUE TO THIS SHORTAGE.

  9. Sources • http://staffwww.fullcoll.edu/fchan/Micro/1MKTEQUIL.htm

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