They thought that if they bought beanie babies in

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Unformatted text preview: t the future price of Beanie Babies would be higher than the current price. They thought that if they bought Beanie Babies in 1998, they could turn around and sell those Beanie Babies at a higher price in 1999, or 2000, or in some later year. Then Came the Internet Bubble businesses and family jewels just to buy a few tulip bulbs. Why would people behave in this way? The answer has to do with what these people thought the future price of tulips would be. They believed that if they bought tulips today at a relatively lower price, they could sell the tulips at a higher price in the future. 100 Chapter 4 Demand One more example: Internet stocks in the late 1990s. Everyone seemed to be saying that the prices were going to be higher next week or next month and so you ought to buy the stocks as soon as possible. Even though many experts said the stocks were overpriced, people kept buying, thinking that the prices would continue to climb. Many people borrowed money to buy the stocks. And What About Real Estate Prices? Well, Beanie Babies, tulips, and many Internet stocks all crashed in price. Beanie Babies that once sold for $100 were selling for $5; tulips that sold for hundreds of thousands of dollars ended up selling for (the equivalent of) a few pennies; and Internet stock prices in some cases went from $400 a share to a few cents a share. Do you think real estate prices might be similar to these examples? During the period from 2001 to 2005 in many places around the country, all you heard was how home prices were destined—yes, destined—to just keep on rising. It was as if some law—let’s call it the law of antigravity—kept pulling prices up, much like the real law of gravity pulls things down. In southern California, especially coastal southern California, it was not uncommon to hear people say, “There is no way Stock traders such as these participated in the buying surge of Internet stocks in the late 1990s. 04 (086-109) EMC Chap 04 11/17/05 4:37 PM Page 101 Can economists predict when real estate prices will rise or fall? that houses near the coast are going to go down in price. After all, there’s only so much coast to go around.” At the time, many people were buying houses not to live in, but to speculate on. In other words, they bought a house in 2003 because they were “certain” they could sell the house in 2004 for a higher price. Many of these people did just that. Of course, many of the people who bought Beanie Babies, tulips, and Internet stocks did the same thing: they bought low and sold high. Not everybody was so fortunate. In all three crazes—Beanie Babies, tulips, and Internet stocks—some people bought at high prices and ended up selling at low prices. Will it be the same with houses? It very well could be. It’s happened before, and no economic law says it won’t happen again. One Last Point Consider George. George watches as the price of houses skyrockets. He also notices that house prices are rising much more rapidly than house rents. Based on the discrepancy between the rate of change in house rents and the rate of change in house prices, he is quite sure that sometime in the future house prices will decline (perhaps very quickly). What George doesn’t know is when house prices will start to decline. Will the price decline begin next week, next month, next year, or five years from now? It is much harder to predict the timing of an event than it is to predict the event. (The doctor can tell the pregant woman that she is going to have a baby, but be unsure of the day and time. The weather forecaster is fairly sure that it will rain in the next 24 hours, but he’s not sure if the rain will start at 7:08 a.m. or at 9:32 a.m.) n s Action Pla al Economic My Person me consider and so want to points you may Here are some practice: want to put into but elines you might guid s nowhere to go ys that “price ha e ne sa ❑ 1. When someoht want to recall what happened to th . Many ocks mig up,” you d Internet st Babies, tulips, an that. price of Beanie be true are just und too good to things that so talk to some l decision, I will a major financia y deciBefore making ake sure that m e research to m som experts and do t “hype.” sed on facts, no sion is ba use you can on that just beca t when p to the conclusi ❑ 2. Don’t jum at an event will occur, you can predict even no one, no predict th Remember that with event will occur. the field, can know s in a particular rt r. the leading expe ic event will occu when an econom certainty ✔ ✔ Chapter 4 Demand 101 04 (086-109) EMC Chap 04 11/17/05 4:37 PM Page 102 Focus Questions What is elasticity of demand? How do we compute elasticity of demand? What does it mean to say that the demand for a good is elastic? Inelastic? Unit elastic? What factors can change the elasticity of demand? Does an increase in price for a good necessarily bring about a higher total revenue? Elasticity of Demand Key Terms elasticity of demand elastic demand inelastic demand unit-elastic demand What Is Elasticity of Demand? el...
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This document was uploaded on 01/16/2014.

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