S11 E22 How Do Economies Really Work with William Eastman
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S11 E22 How Do Economies Really Work with William Eastman
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About this listen
The business cycle is easy to understand. Every 8 - 12 years, an economy goes through an expansion and contraction. An expansion follows a contraction where the economy has been cleansed of bad capital or investment decisions. Consumer attitudes change from fear to exuberance. People perceive good times are back and they start buying - demand. Businesses read this shift in attitude and begin increasing production, creating new products and services - supply to meet the demand, and what is the trigger?
When demand exceeds supply, it drives up the price and invites more investments in those areas. At some point, the prices reach an equilibrium point which starts the bubble phase. Bubbles are nothing more than an overproduction of goods and services because the feedback loop is slow. By the time businesses realize they have over produced prices are already falling apart and they are stuck with inventory (labor) nobody wants and the bubble bursts.
Topics: The Business Cycle The Price Mechanism The Inevitability of Bubbles Why Bubbles Burst?