Nowadays, the term “market-clearing price” (or “equilibrium price”) is actively used in economics. Market clearing price is the value of the goods or services that is established when “the quantity supplied is equal to the quantity demanded.” In other words, this price exists when there are no shortages or surpluses of the products and services in the market.
In order to enable the establishment of the equilibrium price, it is necessary to achieve a certain economic condition, namely, the equality of market demand and supply. For a better understanding of the concept, the market-clearing price graph is presented below.
The graph shows the relationships between demand and supply. The marketing-clearing price can exist only at the intersection of both items, which is usually called as the market equilibrium point. The situation when the supply excesses the demand is called a surplus, while the case when the demand is higher than the supply is known as a shortage. Therefore, the market-clearing price formula is Qs=Qd, where Q stands for quantity, S for supply, and D for demand.
The clearing market is a perfect condition for both manufacturers and consumers as it ensures economic stability. For this reason, producers always regulate prices in accordance with the situation in the market in order to maintain the equilibrium point. For example, if a surplus exists, the prices fall down to decrease the quantity of supplied products until the excess is eliminated.
Similarly, if the products are often out of stock, the manufacturers raise the prices to drop demand. It is also significant to note that every fluctuation in price, supply, or demand of a product cause changes in the market. Therefore, sometimes, it can be challenging to maintain economic balance and establish a marketing-clearing price.