Market Clearing Approach

The market clearing approach is similar to the idea of the “invisible hand” of the market doing its thing. The market clearing approach says that prices adjust to “clear markets,” which means that the amount of goods bought up is the same as the amount of goods produced. There are no excess goods on the shelves, and there are no angry people from a too-low supply of those goods.

The market clearing price is also called the equilibrium price, or when the market “reaches equilibrium.” It’s free market utopia.

You’re probably thinking, "well, that’s not the way things really are." And you’re not wrong. But the market clearing approach is more about the idea that markets tend to move naturally toward the market clearing price. They might over-correct one way, leaving businesses with too much supply, and over-correct the other way, with not enough of the good created to match demand. But supply and demand will keep trying to find that sweet spot that makes everyone happy. It’s nature’s way.