Editing Market clearing (section)

==Mechanism and examples==
A '''market-clearing price''' is the [[price]] of a good or service at which the quantity supplied equals the quantity demanded, also called the [[equilibrium price]].<ref>{{cite book |last1=Arora |first1=K.G. |title=Introductory Microeconomics |date=2007 |publisher=McGraw-Hill Education (India) Pvt Limited |location=India |isbn=9780070616615 |page=260}}</ref> The theory claims that markets tend to move toward this price. Supply is fixed for a one-time sale of goods, so the market-clearing price is simply the maximum price at which all items can be sold. In a market where goods are produced and sold on an ongoing basis, the theory predicts that the market will move toward a price where the quantity supplied in a broad period of time will equal the quantity demanded. This might be measured over a week, month, or year to smooth out irregularities caused by manufacturing batches and delivery schedules; some sellers may maintain inventory buffers to ensure that products are always available for retail sale and to smooth out irregularities caused by manufacturing and delivery schedules, others employ [[Just-in-time manufacturing]] to increase profits in normal operations with the trade-off being  greater disruption when irregularities do inevitably occur (eg. drastic market fluctuations, natural disasters, pandemics, power outages, etc...).

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. When supply and demand are equal, a market clearing takes place. The market must experience a [[shortage]] or a [[Surplus value|surplus]] to reach this state. A shortage indicates that buyers are interested in purchasing something, but need help to afford to do so at current prices. Conversely, a surplus occurs when there is an excess product beyond the quantity that buyers are willing to purchase at current prices. [[New classical macroeconomics|New classical economics]] does not assume perfect information in the short run, but markets may approach efficient outcomes as information is discovered.<ref>{{Cite web |title=New Classical Economics and Efficient Markets |url=https://business.baylor.edu//Tom_Kelly/New%20Classical%20Economics%20and%20Efficient%20Markets.htm |access-date=2022-11-23 |website=business.baylor.edu}}</ref>

If the sale price exceeds the market-clearing price, supply will exceed demand, and a surplus inventory will build up over the [[Long run and short run|long run]]. If the sale price is lower than the market-clearing price, then demand will exceed supply, and in the long run, shortages will result, where buyers sometimes find no products for sale at any price.

The market-clearing theory states that prices in a free market tend towards equilibrium, where the quantity of goods or services supplied equals the quantity demanded. The theory assumes that prices adjust quickly to any changes in supply or demand, meaning that markets can reach equilibrium instantaneously. For example, consider a scenario where a community experiences an earthquake that destroys all houses and apartments. The sudden demand for new housing will create a temporary shortage of houses and apartments in the market. However, if prices are free to change, construction companies will build new houses in the short run, while new companies will enter the house and apartment construction market in the longer run. As a result, the housing supply will increase, eventually reaching a point where it equals the new demand. This adjustment mechanism clears the shortage from the market, establishing a new equilibrium where the market is in balance. This adjustment process is critical in ensuring that markets operate efficiently, promoting economic growth and stability. This increase in production brings supply into harmony with the new demand. The adjustment mechanism has cleared the shortage from the market and established a new equilibrium. A similar mechanism is believed to operate when there is a market surplus (glut), where prices fall until all the excess supply is sold. An example of excess supply is [[Christmas decorations]] that are still in stores several days after Christmas; the stores that still have boxes of decorations view these products as excess supply, so prices are discounted until shoppers buy all the decorations (to keep them until next Christmas).