I’ve tried to do my own research but I just can’t seem to grasp the concept. How do bubbles form? Why doesn’t the “invisible hand” of the market keep this from happening? Wouldn’t supply/demand naturally control prices and keep this from happening? Why do some markets form bubbles when others, like the diamond industry, don’t?
In: Economics
Usually they’re based on extrapolated *forecasted* demand, which briefly drives *current* demand by investors that greatly exceeds the normal producer/consumer supply/demand equilibrium.
Whether it’s beanie babies or houses in Estero, Florida or tulip bulbs, something grows in popularity and demand for legitimate reasons.
Then, seeing the uptrend in demand and limited supply, shrewd early investors buy low and sell high as prices rise. The tales of quick riches attracts less shrewd investors who want the same thing, and they buy high and sell higher.
This continues until the prices and hysteria reach unsustainable levels. Everyone and their dog knows that you’ll get stabbed in a McDonalds over teenie beanies, but once the speculators and collectors have all built their stockpiles a question arises:
Who the F will pay $500 for that kids toy now that all the investors have bought in and only the original underlying base demand is left?
The answer is nobody, and once the real consumer demand is the only demand left, prices crater back to earth.
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