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EHeller comments on Unemployment explanations - Less Wrong
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I think "markets clear" implies the market finds the market-clearing price, in which case everything gets sold (i.e. no surplus inventories over the long run).
The market does indeed find the market-clearing price, that's what markets do, but I don't see how that leads to "everything gets sold", especially given that that the market-clearing price changes over time.
If the supply and demands are perfectly balanced, how is it possible that there are some goods not being sold?
Because some owners of the goods are not interested in selling at the current market-clearing price and because some potential buyers are not interested in buying at the current market-clearing price.
Supply and demand are not fixed scalars, they are functions of the price.
What does it mean for supply and demand to be balanced, then? How do we tell the difference between a market where they are balanced and a market where they aren't balanced?
What does it mean for supply and demand to be balanced, then?
Just solve the equation: supply(price) = demand(price)
In the market where they are not balanced there is either excess supply or unsatisfied demand at the prevailing price. The usual reason is some constraints on prices.
So empirically, what is the difference between a market that hasn't cleared vs. one that has, in your view? What would that look like in terms of inventories?
The usual definition of market clearing implies that we don't end up with surplus inventories building up over time (because everything is sold), etc.
Well, as I said, there is either excess supply or unsatisfied demand -- that's pretty empirical.
Take the old Soviet-style planned economies -- they had lots of markets that didn't clear. In the US, for example, there are certain things in very limited supply with more or less fixed prices -- e.g. licenses to go photograph bears fishing for salmon on Katmai peninsula -- they are allocated on the basis of lotteries. These markets don't clear. In another example, financial markets sometimes have limits on price movement during one day -- once that limit is reached, the price can go no further. In such cases these markets don't clear either.
We don't end up with surplus inventories (mostly) because the situation is dynamic: both the prices and the people adjust over time.
But you shifted it to "excess supply or unsatsified demand at the prevailing price" which is a much harder thing empirically. Demand is itself somewhat hard to measure, but supply is easy, just measure inventories.
You claim that "market clearing" doesn't imply there are no excess inventories, I claim that it does.
This is the definition of market clearing. The market clearing price is found, and everything sells.
So now it sounds like you agree that in a market that has "cleared," everything sold.
Nah, I was just too lazy to type out the whole thing. I still mean "at the prevailing price" -- note that all the examples I give work this way.
I am not sure what "excess inventories" are. But let's take a simple example -- a stock market. Let's take IBM which closed tonight at $162.15. This was the market clearing price at the close and the market cleared. Even though the market cleared, the order book wasn't empty -- there were people willing to buy at, say, $162 and people willing to sell at, say, $163. Was there inventory? Sure. Was there excess inventory? I don't know since I have not idea what it means.
See above. No, not everything sells.
No, that is wrong. A market that cleared is the market which found the market-clearing price and traded at that price all amounts that were there to be traded at that price. That does mean that "everything sold" -- there is nothing which says that all goods on offer are on offer at the current market-clearing price. See the stock market example above.