Economic bubbles and who inflates them
Surely you have heard many times before about such an economic term as a economic bubble, and if not, in today’s article we will introduce you to it. In fact, there is nothing complicated in it. However, this term does not mean such a rosy concept, which may seem to us at first glance.
So, look around you. What do you see? Perhaps a computer. A phone. TV. Or maybe chips and cola?) In any case, all these are products created by society for its own good and delivered to you at a certain price. Have you noticed that this price is gradually increasing from year to year until it collapses? This is called a bubble. More precisely – the economic cycle, characterized by rapid expansion and immediately after – compression.
Let’s talk about tulips. In the 17th century, Danish ships brought them to Europe from the east, and therefore the flower was considered exotic and was in special demand. By the 30s, as a result of the spread of a peculiar flower virus that painted tulips in even more unusual colors, the demand for them increased even more. And along with the demand, as you can guess, the price. Mania began – a phenomenon in which the price of a product rises along with the willingness to pay a significant amount of money for it.
The more people willing to pay for a product, the higher its price rises.
Price, including tulips, is born from market supply and demand. There is limited supply and high demand – the conclusion is obvious, the price will skyrocket, like a bloated soap bubble.
But what does this need to happen to end mania? True, the consumer needs to open his eyes to the fact that the offer price generated by hype and universal mania does not at all correspond to the internal price of the goods. It is then that the demand for goods, for our tulips, will fall sharply, as will the price for them. The bubble burst.
Economic bubbles are generally considered harmful to the economy because they lead to sub-optimal allocation and consumption of resources. In addition, a collapse, usually following an economic bubble, can destroy a huge amount of capital and cause a long recession in the economy. A long period of risk-free profits can prolong the recession (as it was for a significant part of the world during the Great Depression in the 1930s and in the 1990s in Japan, during the real estate boom). The consequences of the collapse of the bubble can not only devastate the national economy, but also respond beyond its borders.
Now the emergence of economic bubbles is being monitored by experts. However their appearance is quite difficult to predict due to the inability to clearly monitor price formation.