Economics
Chapter 3: Elasticity
3.2 The time dimension
S H O RT - R U N A N D LO N G - R U N A D J U S T M E N T
Producers and consumers take time to respond to a change in price. The longer the time period, the
bigger the response, and thus the greater the elasticity of supply and demand.
PRICE E X PE C TAT I O N S A N D S P E C U L AT I O N
If people think prices are likely to change in the foreseeable future, this will affect the behaviour of buyers
and sellers now.
Speculation = Where people make buying or selling decisions based on their anticipations of future
prices.
Speculation is often based on current trends in prices.
Sometimes people will take advantage of expected price rises purely to make money and have no
intention of keeping the item they have bought.
Similarly, people will sometimes take advantage of expected price reductions by selling something now
only to buy it back later.
Speculators = People who buy (or sell) commodities or financial assets with the intention of profiting by
selling them (or buying them back) at a later date at a higher (lower) price.
The predictions of individual speculators may turn out to be wrong, and then they could make losses
rather than profits.
Self-fulfilling speculation = The actions of speculators tend to cause the very effect that they had
anticipated.
Speculation can either help to reduce price fluctuations or aggravate them: it can be stabilising or
destabilising.
Stabilising speculation
Stabilising speculation = Where the actions of speculators tend to reduce price fluctuations. (temporary)
AN INITIAL FALL IN PRICE
Chapter 3: Elasticity
3.2 The time dimension
S H O RT - R U N A N D LO N G - R U N A D J U S T M E N T
Producers and consumers take time to respond to a change in price. The longer the time period, the
bigger the response, and thus the greater the elasticity of supply and demand.
PRICE E X PE C TAT I O N S A N D S P E C U L AT I O N
If people think prices are likely to change in the foreseeable future, this will affect the behaviour of buyers
and sellers now.
Speculation = Where people make buying or selling decisions based on their anticipations of future
prices.
Speculation is often based on current trends in prices.
Sometimes people will take advantage of expected price rises purely to make money and have no
intention of keeping the item they have bought.
Similarly, people will sometimes take advantage of expected price reductions by selling something now
only to buy it back later.
Speculators = People who buy (or sell) commodities or financial assets with the intention of profiting by
selling them (or buying them back) at a later date at a higher (lower) price.
The predictions of individual speculators may turn out to be wrong, and then they could make losses
rather than profits.
Self-fulfilling speculation = The actions of speculators tend to cause the very effect that they had
anticipated.
Speculation can either help to reduce price fluctuations or aggravate them: it can be stabilising or
destabilising.
Stabilising speculation
Stabilising speculation = Where the actions of speculators tend to reduce price fluctuations. (temporary)
AN INITIAL FALL IN PRICE
