Market clearing

The market clears when the price reaches a point where demand and supply are in equilibrium, enabling individuals to buy or sell whatever they desire at that cost.

The theory assumes that prices adjust quickly to any changes in supply or demand, meaning that markets can reach equilibrium instantaneously.

This adjustment process is critical in ensuring that markets operate efficiently, promoting economic growth and stability.

A similar mechanism is believed to operate when there is a market surplus (glut), where prices fall until all the excess supply is sold.

For 150 years (from approximately 1785 to 1935), most economists took the smooth operation of this market-clearing mechanism as inevitable and inviolable, based mainly on belief in Say's law.

In one interpretation, Keynes identified imperfections in the adjustment mechanism that, if present, could introduce rigidities and make prices sticky.

Therefore, many macro-economists feel that price flexibility is a reasonable assumption for studying long-run issues, such as growth in real GDP.

Other economists argue that price adjustment may take so much time that the process of calibration may change the underlying conditions that determine long-run equilibrium.

If there is an oversupply of a product, its price will drop until buyers find it affordable, and in the case of a labor surplus, wages will decrease until employers can offer jobs to all willing workers.

For instance, retailers may offer discounts on old cell phones and computers to sell them quickly and balance their inventory.

In retail stores , when a business ends up with too much of a certain product, which remains unsold at its longstanding price (such as unsold summer clothing as the colder season approaches), the store will typically discount the price until the excess stock is sold, a simple example of market clearing.