The Dutch tulip bulb crisis (AKA “Tulipmania”) in February 1637, happened as the contract prices for Tulip bulbs soared from November 1636 to January 1637 and suddenly collapsed in February 1637. What does the case illustrate?
Explanation
The Dutch Tulip bulb crisis is an example of a speculative bubble. At the peak of Tulipmania in February 1637, tulip contracts sold for more than 10 times the annual income of a skilled craftsman. After the collapse, they had fallen to 1/200th of the peak prices.
Key Takeaway: A speculative bubble happens when there is frenzied optimism about the value of an asset. This leads to an increase in the quantity demanded, which causes the price to rapidly increase and the buyers outnumber the sellers. However, when the bubble bursts, holders of the assets rush to exit and the price rapidly falls. This in turn causes a collapse in the asset prices, intense pessimism, and financial distress.
