A bubble is the term often used to describe a situation where a rapid increase in the price for some good appears to have no good economic explanation. For example, the rapid run-up in housing prices that occurred in the United States and around the world between 2002 and 2007 is often called a “housing price bubble.”

a) Using your knowledge of supply and demand, can you explain the increase in housing prices?

b) Would you agree that the increase in housing prices had no economic basis?