cobweb model

The Cobweb model is an economics model of cyclical supply and demand in which there is a lag between response of producers to a change of price. Farming is a good example, as there is a lag between planting and harvesting. On the diagram below, equilibrium is at the intersection of supply and demand, where Q satisfies supply and demand at price P. If there is then a poor harvest (using the farming example) in period 1 (1 on the diagram), supply falls to Q1, and prices rise to P2, corresponding to point 2 on the diagram. Producers then start new production influenced by this high price, and in the next period (3) supply Q2. Prices must now fall to P3 (point 4 on diagram) to sell all output. The process repeats itself, until it eventually converges at Q0, where the system is stable. If the slopes where drawn so that supply was steeper than demand (on price axis), the fluctuations would get wider and wider. If the slopes were equal then the cycle would oscillate around the equilibrium.

Cobweb Model

See also