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The Cobweb model or Cobweb theory explains why prices in certain markets are subject to periodic fluctuation. It is an economic model of cyclical supply and demand in which there is a lag between response of producers to a change of price. It is sometimes called the hog-cycle, a reference to the fluctuation of American pig prices in the 1930s.
Creation of model
The cobweb model was identified by the Hungarian economist, Nicholas Kaldor.
Examples
Farming is a good example, as there is a lag between planting and harvesting. The classic example is that of the market for agricultural goods, such as the market for strawberries. As a result of good weather, the strawberry crop is very good and strawberry farmers go to market with many strawberries. This unusually high supply, equivalent to a rightward shift in the market's supply curve, results in low prices. Therefore, the following year, farmers will reduce their production of strawberries in favor of other goods. When they go to market, the supply will then be low, equivalent to a leftward shift in the supply curve, resulting in high prices. Thus, the following year, farmers will increase their production of strawberries and then find that when they go to market, prices are low.
Another example is illustrated in the diagram to the right. 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.
This cycle will continue to repeat in one of three ways: If the slopes were drawn so that supply was steeper than demand (on price axis), the fluctuations would get wider and wider and fluctuations may become more and more drastic, and so a plot of the equilibriums in each period over time would look like an outward spiral (divergent). Alternatively, fluctuations may become less and less drastic, and so a plot of the equilibriums in each period over time would look like an inward spiral (convergent). Fluctuations may also remain constant (stable), and so a plot of the equilibriums would produce a simple; this scenario is unlikely in the short to medium term. In either of the first two scenarios, the combination of the spiral and the supply and demand curves often looks like a cobweb, hence the name of the theory.
Criticisms of model
One criticism of this model is its assumption that producers are extremely shortsighted; they are fundamentally unable to judge market conditions or learn from their pricing mistakes that result in surplus/shortfall cycles. This assumption is seen to be unrealistic.
See also
"Cobweb model"