Read the sections on Demand, Supply, Market Equilibrium, and Government Intervention and Disequilibrium for a mathematical exposition of the demand and supply model, clicking through to the next when you have finished each page. The chapter also covers price ceilings and price floor analysis as well as quantity regulations.
3. Market Equilibrium - Clearing the Market at Equilibrium Price and Quantity
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
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 allows
incumbents (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
is an opportunity cost in not investing that money elsewhere.
This opportunity cost creates the assumption that money will not go
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.