In economics, market clearing is the process by which, in an economic market, the supply of whatever is traded is equated to the demand, so that there is no leftover supply or demand. The new classical economics assumes that, in any given market, assuming that all buyers and sellers have access to information and that there is not "friction" impeding price changes, prices always adjust up or down to ensure market clearing. A market-clearing price is the price of a good or service at which quantity supplied is equal to quantity demanded called the equilibrium price; the theory claims. For a one-time sale of goods, supply is fixed, so the market-clearing price is the price at which all items can be sold, but no lower. In this case, the marketplace is cleared of all goods. For 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 time period will equal the quantity demanded; this might be measured over a period like a week, month or year, to smooth out irregularities caused by manufacturing in batches, delivery schedules.
If the sale price is higher than the market-clearing price supply will exceed demand, a surplus inventory will build up over the long run. If the sale price is lower than the market-clearing price demand will exceed supply, in the long run shortages will result, where buyers sometimes find no products for sale at any price; the first version of market-clearing theory assumes that the price adjustment process occurs instantaneously. If, for example, a community is subject to an earthquake which destroys all of the houses and apartments, its members will have a sudden increased demand for new housing. After the disaster, the market for housing in the community will be temporarily out of equilibrium, suffering from an excess demand for houses and apartments, but if markets are free to operate, given enough time, prices will increase causing construction companies to build new houses in the short run and new companies to enter the house and apartment-construction market in the longer run. This increase in production brings supply into balance with the new demand.
The adjustment mechanism has established a new equilibrium. A similar mechanism is believed to operate when there is a market surplus, where prices fall until all the excess supply is sold off. An example of excess supply is Christmas decorations that are still in stores several days after Christmas. For 150 years, the vast majority of economists took the smooth operation of this market-clearing mechanism as inevitable and inviolable, based on belief in Say's law, but the Great Depression of the 1930s caused many economists, including John Maynard Keynes, to doubt their classical faith. If markets were supposed to clear, how could ruinously high rates of unemployment persist for so many painful years? Was the market mechanism not supposed to eliminate such surpluses? In one interpretation, Keynes identified imperfections in the adjustment mechanism that, if present, could introduce rigidities and make prices sticky. In another interpretation, price adjustment could make matters worse, causing what Irving Fisher called "debt deflation".
Not all economists accept these theories. They attribute what appears to be imperfect clearing to factors like labor unions or government policy, thereby exonerating the clearing mechanism. Most economists see the assumption of continuous market clearing as not realistic. However, many see the assumption of flexible prices as useful in long-run analysis, since prices are not stuck forever: market-clearing models describe the equilibrium towards which the economy gravitates. Therefore, many macroeconomists feel that price flexibility is a good 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 equilibration may change the underlying conditions that determine long-run equilibrium; that is, there may be path dependence, as when a long depression changes the nature of the "full employment" period that follows. In the short run, markets may find a temporary equilibrium at a price and quantity that does not correspond with the long term market clearing equilibrium.
For example, in the theory of "efficiency wages", a labor market can be in equilibrium above the market-clearing wage, since each employer has the incentive to pay wages above market-clearing to motivate their employees on the job. In this case, equilibrium wages would not be the same as market-clearing wages. Double auction Economic equilibrium Supply and demand
An oligopoly is a market form wherein a market or industry is dominated by a small number of large sellers. Oligopolies can result from various forms of collusion which reduce competition and lead to higher prices for consumers. Oligopolies have their own market structure. With few sellers, each oligopolist is to be aware of the actions of the others. According to game theory, the decisions of one firm therefore influence and are influenced by decisions of other firms. Strategic planning by oligopolists needs to take into account the responses of the other market. Entry barriers include high investment requirements, strong consumer loyalty for existing brands and economies of scale. In developed economies oligopolies dominate the economy as the competitive model is of negligible importance for consumers. Oligopolies differ from price takers. Instead, they search for the best price-output combination. Oligopoly is a common market form; as a quantitative description of oligopoly, the four-firm concentration ratio is utilized.
This measure expresses, as a percentage, the market share of the four largest firms in any particular industry. For example, as of fourth quarter 2008, if we combine total market share of Verizon Wireless, AT&T, T-Mobile, we see that these firms, control 97% of the U. S. cellular telephone market. Oligopolistic competition can give rise to both diverse outcomes. In some situations, particular companies may employ restrictive trade practices in order to inflate prices and restrict production in much the same way that a monopoly does. Whenever there is a formal agreement for such collusion, between companies that compete with one another, this practice is known as a cartel. A prime example of such a cartel is OPEC, which has a profound influence on the international price of oil. Firms collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place –for example, in some industries there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.
In other situations, competition between sellers in an oligopoly can be fierce, with low prices and high production. This could lead to an efficient outcome approaching perfect competition; the competition in an oligopoly can be greater when there are more firms in an industry than if, for example, the firms were only regionally based and did not compete directly with each other. Thus the welfare analysis of oligopolies is sensitive to the parameter values used to define the market's structure. In particular, the level of dead weight loss is hard to measure; the study of product differentiation indicates that oligopolies might create excessive levels of differentiation in order to stifle competition. Oligopoly theory makes heavy use of game theory to model the behavior of oligopolies: Stackelberg's duopoly. In this model, the firms move sequentially. Cournot's duopoly. In this model, the firms choose quantities. Bertrand's oligopoly. In this model, the firms choose prices. Profit maximization conditions An oligopoly maximizes profits.
Ability to set price Oligopolies are price setters rather than price takers. Entry and exit Barriers to entry are high; the most important barriers are government licenses, economies of scale, access to expensive and complex technology, strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry result from government regulation favoring existing firms making it difficult for new firms to enter the market. Number of firms "Few" – a "handful" of sellers. There are so few firms. Long run profits Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits. Product differentiation Product may be differentiated. Perfect knowledge Assumptions about perfect knowledge vary but the knowledge of various economic factors can be described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete.
Buyers have only imperfect knowledge as to price and product quality. Interdependence The distinctive feature of an oligopoly is interdependence. Oligopolies are composed of a few large firms; each firm is so large. Therefore, the competing firms will be aware of a firm's market actions and will respond appropriately; this means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firm's countermoves. It is much like a game of chess, in which a player must anticipate a whole sequence of moves and countermoves in order to determine how to achieve his or her objectives. For example, an oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would lower their prices and trigger a ruinous price war. Or if the firm is considering a price increase, it may want
A price is the quantity of payment or compensation given by one party to another in return for one unit of goods or services.. A price is influenced by both production costs and demand for the product. A price may be imposed on the firm by market conditions. In modern economies, prices are expressed in units of some form of currency. Although prices could be quoted as quantities of other goods or services, this sort of barter exchange is seen. Prices are sometimes quoted in terms of vouchers such as trading stamps and air miles. In some circumstances, cigarettes have been used as currency, for example in prisons, in times of hyperinflation, in some places during World War II. In a black market economy, barter is relatively common. In many financial transactions, it is customary to quote prices in other ways; the most obvious example is in pricing a loan, when the cost will be expressed as the percentage rate of interest. The total amount of interest payable depends upon credit risk, the loan amount and the period of the loan.
Other examples can be found in other financial assets. For instance the price of inflation-linked government securities in several countries is quoted as the actual price divided by a factor representing inflation since the security was issued. "Price" sometimes refers to the quantity of payment requested by a seller of goods or services, rather than the eventual payment amount. This requested amount is called the asking price or selling price, while the actual payment may be called the transaction price or traded price; the bid price or buying price is the quantity of payment offered by a buyer of goods or services, although this meaning is more common in asset or financial markets than in consumer markets. Economic price theory asserts that in a free market economy the market price reflects interaction between supply and demand: the price is set so as to equate the quantity being supplied and that being demanded. In turn these quantities are determined by the marginal utility of the asset to different buyers and to different sellers.
Supply and demand, hence price, may be influenced by other factors, such as government subsidy or manipulation through industry collusion. When a commodity is for sale at multiple locations, the law of one price is believed to hold; this states that the cost difference between the locations cannot be greater than that representing shipping, other distribution costs and more. The paradox of value was debated by classical economists. Adam Smith described what is now called the diamond – water paradox: diamonds command a higher price than water, yet water is essential for life and diamonds are ornamentation. Use value was supposed to give some measure of usefulness refined as marginal benefit while exchange value was the measure of how much one good was in terms of another, namely what is now called relative price. One solution offered to the paradox of value is through the theory of marginal utility proposed by Carl Menger, one of the founders of the Austrian School of economics; as William Barber put it, human volition, the human subject, was "brought to the centre of the stage" by marginalist economics, as a bargaining tool.
Neoclassical economists sought to clarify choices open to producers and consumers in market situations, thus "fears that cleavages in the economic structure might be unbridgeable could be suppressed". Without denying the applicability of the Austrian theory of value as subjective only, within certain contexts of price behavior, the Polish economist Oskar Lange felt it was necessary to attempt a serious integration of the insights of classical political economy with neo-classical economics; this would result in a much more realistic theory of price and of real behavior in response to prices. Marginalist theory lacked anything like a theory of the social framework of real market functioning, criticism sparked off by the capital controversy initiated by Piero Sraffa revealed that most of the foundational tenets of the marginalist theory of value either reduced to tautologies, or that the theory was true only if counter-factual conditions applied. One insight ignored in the debates about price theory is something that businessmen are keenly aware of: in different markets, prices may not function according to the same principles except in some abstract sense.
From the classical political economists to Michal Kalecki it was known that prices for industrial goods behaved differently from prices for agricultural goods, but this idea could be extended further to other broad classes of goods and services. Marxists assert that value derives from the volume of necessary labour time exerted in the creation of an object; this value does not relate to price in a simple manner, the difficulty of the conversion of the mass of values into the actual prices is known as the transformation problem. However, many recent Marxists deny. Marx was not concerned with proving. In fact, he admonished the other classical political economists for trying to make this proof. Rather, for Marx, price equals the average rate of profit. So if the average rate of profit is 22% prices would reflect cost-of-production plus 22%; the perception that there is a transformation problem in Marx stems from the injection of Walrasian equilibrium theory into Marxism where there is no such thing as equilibrium.
Price is co
Economics is the social science that studies the production and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents. Microeconomics analyzes basic elements in the economy, including individual agents and markets, their interactions, the outcomes of interactions. Individual agents may include, for example, firms and sellers. Macroeconomics analyzes the entire economy and issues affecting it, including unemployment of resources, economic growth, the public policies that address these issues. See glossary of economics. Other broad distinctions within economics include those between positive economics, describing "what is", normative economics, advocating "what ought to be". Economic analysis can be applied throughout society, in business, health care, government. Economic analysis is sometimes applied to such diverse subjects as crime, the family, politics, social institutions, war and the environment; the discipline was renamed in the late 19th century due to Alfred Marshall, from "political economy" to "economics" as a shorter term for "economic science".
At that time, it became more open to rigorous thinking and made increased use of mathematics, which helped support efforts to have it accepted as a science and as a separate discipline outside of political science and other social sciences. There are a variety of modern definitions of economics. Scottish philosopher Adam Smith defined what was called political economy as "an inquiry into the nature and causes of the wealth of nations", in particular as: a branch of the science of a statesman or legislator a plentiful revenue or subsistence for the people... to supply the state or commonwealth with a revenue for the publick services. Jean-Baptiste Say, distinguishing the subject from its public-policy uses, defines it as the science of production and consumption of wealth. On the satirical side, Thomas Carlyle coined "the dismal science" as an epithet for classical economics, in this context linked to the pessimistic analysis of Malthus. John Stuart Mill defines the subject in a social context as: The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.
Alfred Marshall provides a still cited definition in his textbook Principles of Economics that extends analysis beyond wealth and from the societal to the microeconomic level: Economics is a study of man in the ordinary business of life. It enquires how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man. Lionel Robbins developed implications of what has been termed "erhaps the most accepted current definition of the subject": Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. Robbins describes the definition as not classificatory in "pick out certain kinds of behaviour" but rather analytical in "focus attention on a particular aspect of behaviour, the form imposed by the influence of scarcity." He affirmed that previous economists have centred their studies on the analysis of wealth: how wealth is created and consumed. But he said that economics can be used to study other things, such as war, that are outside its usual focus.
This is because war has as the goal winning it, generates both cost and benefits. If the war is not winnable or if the expected costs outweigh the benefits, the deciding actors may never go to war but rather explore other alternatives. We cannot define economics as the science that studies wealth, crime and any other field economic analysis can be applied to; some subsequent comments criticized the definition as overly broad in failing to limit its subject matter to analysis of markets. From the 1960s, such comments abated as the economic theory of maximizing behaviour and rational-choice modelling expanded the domain of the subject to areas treated in other fields. There are other criticisms as well, such as in scarcity not accounting for the macroeconomics of high unemployment. Gary Becker, a contributor to the expansion of economics into new areas, describes the approach he favours as "combin assumptions of maximizing behaviour, stable preferences, market equilibrium, used relentlessly and unflinchingly."
One commentary characterizes the remark as making economics an approach rather than a subject matter but with great specificity as to the "choice process and the type of social interaction that analysis involves." The same source reviews a range of definitions included in principles of economics textbooks and concludes that the lack of agreement need not affect the subject-matter that the texts treat. A