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#cfa #cfa-level-1 #economics #microeconomics #reading-13-demand-and-supply-analysis-introduction #study-session-4
This is price bubbles, buyers and sellers base their expectations of future prices: if price rises, they take that as a sign that price will rise even further.

If buyers see an increase today, they shift the demand curve to the right, desiring to buy more today because they think they would pay more in the future.

Sellers at the same time see an increase in today’s price and think that price will be even higher in the future, they don't sell today holding out for higher prices tomorrow, and that would shift the supply curve to the left.

With a rightward shift in demand and a leftward shift in supply, buyers’ and sellers’ expectations about price are confirmed and the process begins again. This scenario could result in a bubble that would inflate until someone decides that such high prices can no longer be sustained. The bubble bursts and price plunges.
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3.7. The Market Mechanism: Iterating toward Equilibrium—or Not
can behave in ways that are not ultimately sustainable in the long run. They may shoot up for a time but ultimately, if they do not reflect actual valuations, the bubble can burst resulting in a “correction” to a new equilibrium. <span>As a simple approach to understanding bubbles, consider a case in which buyers and sellers base their expectations of future prices on the rate of change of current prices: if price rises, they take that as a sign that price will rise even further. Under these circumstances, if buyers see an increase in price today, they might actually shift the demand curve to the right, desiring to buy more at each price today because they expect to have to pay more in the future. Alternately, if sellers see an increase in today’s price as evidence that price will be even higher in the future, they are reluctant to sell today as they hold out for higher prices tomorrow, and that would shift the supply curve to the left. With a rightward shift in demand and a leftward shift in supply, buyers’ and sellers’ expectations about price are confirmed and the process begins again. This scenario could result in a bubble that would inflate until someone decides that such high prices can no longer be sustained. The bubble bursts and price plunges. <span><body><html>


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