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#cfa #cfa-level-1 #economics #microeconomics #reading-13-demand-and-supply-analysis-introduction #study-session-4 #the-market-mechanism-iterating-toward-equilibrium
Observation suggests that most markets are characterized by stable equilibria. Prices do not often shoot off to infinity or plunge toward zero.
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Observation suggests that most markets are characterized by stable equilibria. Prices do not often shoot off to infinity or plunge toward zero. However, occasionally we do observe price bubbles occurring in real estate, securities, and other markets. It appears that prices can behave in ways that are not ultimately sustainable

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3.7. The Market Mechanism: Iterating toward Equilibrium—or Not
price there would be excess demand, thus driving price even higher. At a price below that equilibrium there would be excess supply, thus driving price even lower toward the lower-priced equilibrium, which is a stable equilibrium. <span>Observation suggests that most markets are characterized by stable equilibria. Prices do not often shoot off to infinity or plunge toward zero. However, occasionally we do observe price bubbles occurring in real estate, securities, and other markets. It appears that prices 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. 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:


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