Cobweb Model

Definition

The cobweb model is a dynamic economic model that explains how prices and quantities in a market may oscillate in a cyclical pattern over time. It is particularly useful in analyzing the behavior of markets for agricultural products, where production decisions are made before prices are known.

5 Must Know Facts For Your Next Test

1. The cobweb model assumes that producers make production decisions based on the previous period's price, leading to cyclical fluctuations in price and quantity.
2. The model can exhibit either a convergent or divergent pattern, depending on the elasticity of supply and demand in the market.
3. In a convergent cobweb, the market eventually reaches a stable equilibrium, while in a divergent cobweb, the oscillations continue indefinitely.
4. The cobweb model is particularly relevant for agricultural markets, where production decisions are made before the current period's price is known.
5. The model helps explain why some agricultural markets experience significant price and quantity volatility, even in the absence of external shocks.

Review Questions

• Explain how the cobweb model relates to the concept of supply and demand in labor markets.
  • The cobweb model can be applied to labor markets, where workers make decisions about their education, training, and career paths based on the previous period's wages or employment conditions. This can lead to cyclical fluctuations in the supply of labor, as workers respond to past signals rather than perfectly anticipating future market conditions. The model helps explain why labor markets may experience periods of labor shortages or surpluses, as workers adjust their decisions based on lagged information.
• Describe how the concept of adaptive expectations is central to the cobweb model.
  • The cobweb model relies on the assumption of adaptive expectations, where economic agents (such as producers) form their expectations about the future based on past experience and observations, rather than perfect foresight. This means that producers make their production decisions based on the previous period's price, rather than attempting to anticipate future market conditions. This adaptive behavior is a key driver of the cyclical fluctuations observed in the cobweb model, as producers repeatedly make decisions based on outdated information.
• Evaluate the conditions under which the cobweb model would predict a convergent or divergent pattern in a market.
  • The cobweb model's prediction of a convergent or divergent pattern depends on the relative elasticities of supply and demand in the market. If the supply curve is more elastic than the demand curve, the model will predict a convergent pattern, where the market eventually reaches a stable equilibrium. Conversely, if the demand curve is more elastic than the supply curve, the model will predict a divergent pattern, where the oscillations in price and quantity continue indefinitely. The relative elasticities of supply and demand are determined by factors such as the availability of substitutes, the time required to adjust production, and the sensitivity of consumers to price changes.

Related terms

Supply and Demand:

The fundamental economic model that describes how the price and quantity of a good or service is determined by the interaction of supply and demand in a market.

Adaptive Expectations:

The assumption that economic agents form their expectations about the future based on past experience and observations, rather than perfect foresight.

Equilibrium:

The state of a market where the quantity supplied is equal to the quantity demanded, and there is no tendency for prices or quantities to change.