What general activity or event(s) mark the time at which an economic "bubble" bursts? e.g. the dot-com bubble, etc.

Would it be considered to have "burst" when intrinsic value is less than price? What about when this drop in intrinsic value might be due to some news event, etc...

Is it simply when prices go down? When speculators exit the market, etc. or is it when "the something" happens that causes the drop in prices or the mass exodus from the market? Or something else altogether?


3 Answers 3


An economic "bubble" bursts when the buyers in the market deem the good or service to be overpriced.

At a certain point, the price of whatever is causing the bubble will reach a certain "threshold price."

It is at this "threshold price" that the corresponding amount of "threshold buyers" is reached. These buyers will stop buying (or continue not to buy) the good or service offered.

In an attempt to incentivize the buyers to continue buying their product, the sellers will lower their price. Of course, certain sellers will lower their prices further to out maneuver each other in order to sell more of their product. This is the burst.

At this point, some of the buyers will recognize the "burst" of the "bubble market" and will become sellers to move their product. This, simultaneously, increases the amount of supply and decreases the demand, further lowering price.

This cycle will continue until a new (lower) equilibrium is reached.

  • 1
    $\begingroup$ Is your definition of burst based on any reference? If so, adding it would improve the answer. $\endgroup$
    – luchonacho
    Commented Sep 13, 2017 at 8:12
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    $\begingroup$ @luchonacho I don't believe that "burst" has a formal definition within economics (if you know otherwise, please let me know). In my answer, I was just using the term "burst" to mean "the point at which the economic bubble is no longer sustainable and the associated market begins to crash." $\endgroup$ Commented Sep 13, 2017 at 11:43
  • $\begingroup$ Would the "burst" be defined as the point at which prices stop climbing and start falling? $\endgroup$
    – GWR
    Commented Sep 13, 2017 at 11:58
  • $\begingroup$ @GWR That is correct. $\endgroup$ Commented Sep 13, 2017 at 12:20

An Economic bubble "bursts" when we see a sudden drop in price (as you have said in your question).

Wikipedia has an appropriate comment on the issue of bubbles being:

"...bubbles are often conclusively identified only in retrospect, once a sudden drop in prices has occurred. Such a drop is known as a crash or a bubble burst."

Thus Economic bubbles (and their bursting) are defined solely on their price increase or decrease.


A bubble is driven by a feedback mechanism...

A bubble may be instigated by a steady rise in price due to fundamentals but after a while there will be investors who are attracted by the fact that the market is rising having made little or no attempt to determine what the correct price should be (let's call these people momentum traders). The logic simply being that if it has been rising steadily for a while then surely it will continue to rise in the future. The addition of these momentum traders will drive a self fulfilling prophesy of rising prices over and above what the fundamentals would dictate. If at a later time the market falters for whatever reason, the demand from momentum traders will evaporate. This will in itself cause a fall in the price. A self fulfilling prophesy in the other direction.


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