marketclearing

Market clearing is a condition in which, at a given price, the quantity supplied of a good or asset equals the quantity demanded, so the market is in balance and there is no inherent pressure for the price to change. The corresponding price is called the market-clearing price or equilibrium price, and the state is often described as a competitive or Walrasian equilibrium.

In competitive markets, prices adjust to equate supply and demand. If demand exceeds supply, the price tends to rise, encouraging more production and reducing demand. If supply exceeds demand, the price tends to fall, reducing production and increasing demand. The excess-demand function Z(p) = D(p) − S(p) measures the imbalance; a price p* that satisfies Z(p*) = 0 is a market-clearing or equilibrium price.

Clearing is achieved through various mechanisms depending on the market structure. Exchange-traded markets use order matching and continuous or periodic clearing, while over-the-counter markets use negotiated trades. Clearinghouses can guarantee settlements and reduce counterparty risk. Design features such as price-time priority, batch versus continuous clearing, and bid-ask spreads influence how efficiently markets clear.

Limitations and considerations include real-world frictions such as transaction costs, information asymmetries, liquidity constraints, and externalities. Some assets may not clear fully due to regulatory limits, market power, or frictions that prevent price adjustment. In practice, multiple equilibria or partial clearing can occur across different market segments.

Applications span goods, financial assets, energy, and other markets. The concept of market clearing helps explain how prices coordinate resource allocation and how interventions—such as taxes, subsidies, or price controls—alter outcomes.