Question

A critical assumption in the classical model is that A. markets are perfectly competitive in the short run B. markets clear in the long run C. markets clear in the short run D. markets are perfectly competitive in the long run E. all variables are expressed in nominal terms

Answer 1

Answer:

Letter B is correct. Markets clear in the long run.

Explanation:

The correct alternative is the letter B, since a market clearing price can be defined as the equilibrium price, which is characterized by the price of a good or service whose quantity offered is the same quantity demanded.

Therefore, when there is a situation in which the sale price is higher than the market clearing price, the supply will be greater than the demand, which will create a stock of surpluses that will accumulate in the long run.

Answer 2

Answer:

B) markets clear in the long run

Explanation:

Market clearing is a great economic concept, like most classical economics concepts, but the bad thing is that they are all theoretical only. That is why market clearing only happens in the long run, because the long run is an indefinite term used to describe forever and ever until the end of days.

Allegedly, when the markets finally reach a clearing point, there is no excess supply or demand. It is the point where the market finally reaches its equilibrium and there are no excess production resulting in wastes and no excess demand resulting in unsatisfied needs. Clearly this is a hypothetical situation that will never happen.

In order for market clearing to happen, you need certain conditions to be present:

1. every single buyer and every single supplier must possess perfect information about the market, i.e. every buyer should know the selling price of every supplier and every supplier must know the maximum price at which a customer is willing to purchase the goods they sell.
2. every buyer and every supplier must be able to reach one another without extra costs, but just moving from your house to a supermarket costs money.
3. there is no government intervention, which means no taxes. This is really impossible to happen.

Even in the markets that are considered to reach an almost perfect competition state, like commodities (oil, agricultural products), wastes exist and extra costs exist, taxes exist and finally there are unsatisfied consumers and production wastes. That is why their price changes every day, because it must be adjusted to external factors besides supply and demand.