Short and Long Run Responses to Price Changes

Last fall, South Dakota businessman Steve Polley was scouting for ways to make some extra income when he saw a news headline: The price of hops was surging because of a global shortage.

From a recent Wall Street journal article on hops (the stuff that makes beer bitter and tasty).

When the price of an agricultural good goes up and there are profits to be made by selling it, people like Steve Polley, will try to start producing more. However, if you plant hops it takes several years to produce any. So if the demand for hops goes up because people like to drink beers like 60 minute IPA or Hops Slam, the price of hops in the short run is likely to surge up.
But after a few years all those farmers who planted additional hops start seeing yields. The price of hops will start to fall back after a few years (the long run). Or as the article put it

Some hops experts are skeptical about the prospects of the new growers. Ralph Olson, owner of Hopunion CBS LLC, a broker of hops, predicts many nascent growers won't be in business in a few years. Prices will come down, and insects can wreak havoc, he warns. Hops "are tough," he says. "The economics aren't there."

Same story can be told about coffee or oil. It takes a few years to adjust to a change in prices.

How to Increase Housing Prices? Import Buyers

One way to look at the current housing crisis is that we have built too many homes. Another way to look at it is we don’t have enough buyers. So how do we get more buyers, Alan Greenspan suggests increase quotas for skilled immigrants. Excerpted from a Wall Street Journal interview

"The most effective initiative, though politically difficult, would be a
major expansion in quotas for skilled immigrants," he (Greenspan) said. The only
sustainable way to increase demand for vacant houses is to spur the formation of
new households. Admitting more skilled immigrants, who tend to earn enough to
buy homes, would accomplish that while paying other dividends to the U.S.
economy.

He estimates the number of new households in the U.S. currently is
increasing at an annual rate of about 800,000, of whom about one third are
immigrants. "Perhaps 150,000 of those are loosely classified as skilled," he
said. "A double or tripling of this number would markedly accelerate the
absorption of unsold housing inventory for sale -- and hence help stabilize
prices."