Correlation between prices and quantities reveals main market driver
If prices and quantities are positively correlated, the market is most likely to be demand-driven, which is to say variation in demand over time is the biggest driver of price movements, inflation, etc. Shifts in demand move the market equilibrium along the supply curve, which is upwards sloping. Thus, price and demand tend to be positively correlated when demand moves around a lot.
On the other hand, a negative correlation between prices and quantities suggest supply forces are the primary market mover. These shifts in supply move the market along the demand curve, which is downward sloping. This makes prices and quantities move in opposite directions.
This heuristic is a nice way to distinguish between demand and supply driven markets:
- For example, the venture capital market is clearly demand-drive, as prices and financing activity tend to move in the same direction