Download When a market achieves perfect equilibrium there is no excess

When a market achieves perfect equilibrium there is no excess supply
or demand, which theoretically results in a market clearing.
LEARNING OBJECTIVE [ edit ]
Define market equilibrium
KEY POINTS [ edit ]
The interdependent relationship between supply and demandin the field of economics is
inherently designed to identify the ideal price and quantity of a given product or service in a
marketplace.
A market clearing, by definition, is the economic assumptionthat the quantity supplied will
consistently align with the quantity demanded.
Market clearing requires a variety of assumptions whichsimplify the complexities of real markets
to coincide with a more theoretical framework, most centrally the assumptions of perfect
competition and Say's Law.
While this concept of market clearing resonates well in theory, the actual execution of markets is
very rarely perfect. The concepts of consolidated markets and 'sticky' markets reduces the
accuracy of these models.
TERMS [ edit ]
Incumbents
A holder of a position as supplier to a market or market segment that allows the holder to earn
above­normal profits.
Say's Law
The idea that money is perishable.
Opportunity cost
The cost of an opportunity forgone (and the loss of the benefits that could be received from that
opportunity); the most valuable forgone alternative.
EXAMPLES [ edit ]
A textbook example of a monopoly was the Da Beers family, who owned the vast majority of
diamond mines worldwide. Through effectively controlling the diamond market supply (via
owning the mines), and warehousing the diamonds in a way to substantially alter the available
supply, it became reasonably easy for Da Beers to charge prices in excess of what a
reasonable equilibrium would be.
Give us feedback on this content: FULL TEXT [ edit ]
The interdependent relationship between
supply and demand in the field of
economics is inherently designed to
identify the ideal price and quantity of a
given product or service in a marketplace.
This equilibrium point is represented by
the intersection of a downward sloping
demand line and an upward sloping
supply line, with price as the y­axis and
quantity as the x­axis . At perfect
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equilibrium there is no excess demand (represented by 'A' in the figure) or excess supply
(represented by 'B' in the figure), which theoretically results in a market clearing.
Equilibrium Pricing
This chart effectively highlights the various basic implications of a simple supply and demand chart. The
equilibrium point is where market clearing will theoretically occur.
Market Clearing Assumptions
A market clearing, by definition, is the economic assumption that the quantity supplied will
consistently align with the quantity demanded. This definition requires a variety of
assumptions which simplify the complexities of real markets to coincide with a more
theoretical framework, most centrally the assumptions of perfect competition and Say's Law:
Perfect competition is a market where the price determined for a given good or service is
not affected by external forces or competition in a way that
allowsincumbents (companies) to attain market influence.
Say's Law hinges on the concept that capital loses value over time, or that money is
essentially perishable. The simplest way to view this law is interest rates. When you
invest or owe money, that capital accrues interest due to the fact that there is
an opportunity cost in not investing that money elsewhere. This opportunity cost creates
the assumption that money will not go unused.
Combining these two assumptions, in a perfectly competitive market the amount of a
product or service that is supplied at a given price will equate to the amount demanded,
clearing the market of all goods/services at a given equilibrium point.
Theory and Practice
While this concept of market clearing resonates well in theory, the actual execution of
markets is very rarely perfect. Markets demonstrate consistent shifts of supply and shifts of
demand based on a wide spectrum of externalities. Even instatic markets there is
competitive consolidation that allows companies to charge differing price points than that of
the equilibrium. The concept of monopolies provides a good example for this experience, as
monopolies (see example) can control price and quantity simultaneously.
Another classic criticism of market clearing is the way in which the labor market functions.
In the 1930's, during the worst depression recorded in the United States, the labor market
did not clear the way economic theories of market clearing would assume it would. Instead,
there seemed to be what John Maynard­Keynes (father of Keynesian Economics) called
'stickiness,' which preventing the market from normalizing. The importance of raising these
concerns is the understanding that while the concept of market clearing, equilibrium and
supply/demand charts are highly useful in understanding the basic functioning of markets,
reality does not always conform with these models.