Cobweb model
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The cobweb model or cobweb theory is an economic model that explains why prices may be subjected to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producers' expectations about prices are assumed to be based on observations of previous prices. Nicholas Kaldor analyzed the model in 1934, coining the term "cobweb theorem" (see Kaldor, 1938 and Pashigian, 2008), citing previous analyses in German by Henry Schultz and Umberto Ricci.
The cobweb model or cobweb theory is an economic model that explains why prices may be subjected to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producers' expectations about prices are assumed to be based on observations of previous prices. Nicholas Kaldor analyzed the model in 1934, coining the term "cobweb theorem" (see Kaldor, 1938 and Pashigian, 2008), citing previous analyses in German by Henry Schultz and Umberto Ricci. In standard microeconomics terminology, define the elasticity of supply as \frac{dQ^S/Q^S}{dP^S/P^S} , and the elasticity of demand as \frac{dQ^D/Q^D}{dP^D/P^D} . If we evaluate these two elasticities at the equilibrium point, that is P^S=P^D=P>0 and Q^S=Q^D=Q>0 , then we see that the convergent case requires \frac{dQ^S/Q}{dP^S/P} whereas the divergent case requires \frac{dQ^S/Q}{dP^S/P}>\left|\frac{dQ^D/Q}{dP^D/P}\right|. In words, the convergent case occurs when the demand curve is more elastic than the supply curve, at the equilibrium point. The divergent case occurs when the supply curve is more elastic than the demand curve, at the equilibrium point (see Kaldor, 1934, page 135, propositions (i) and (ii).)
Sources
W. Nicholson, Microeconomic Theory, 7th ed., Ch. 17, pp. 524–538. Dryden Press: . Jasmina Arifovic, "Genetic Algorithm Learning and the Cobweb Model", Journal of Economic Dynamics and Control, vol. 18, Issue 1, (January 1994), 3-28. Arthur Hanau (1928), "Die Prognose der Schweinepreise". In: Vierteljahreshefte zur Konjunkturforschung, Verlag Reimar Hobbing, Berlin. Nicholas Kaldor, "A Classificatory Note on the Determination of Equilibrium", Review of Economic Studies, vol I (February 1934), 122–36. (See especially pages 133–135.) C.P. Wellford, 'A Laboratory Analysis of Price Dynamics and Expectations in the Cobweb Model', Discussion Paper 89-15 (University of Arizona, Tucson, AZ).
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