What Is the Cobweb Model?

Cobweb model A theory of dynamic analysis that uses the principle of elasticity to explain the different fluctuations of certain products with long production cycles when they lose equilibrium.

Cobweb model

The basic assumption of the cobweb model is that the current output Qts of the commodity is determined by the price Pt-1 of the previous period, that is,

Qtd = - · Pt

Qts = - + · Pt-1

Qtd = Qts

Three equations stand together

Pt = ( + ) / - ( / ) Pt-1

After Pt-1 iteration

Pt = ( + ) / (- / ) ^ i + (- / ) ^ t · P0

which is

Pt = [1-(- / ) ^ t] ( + ) / ( + ) + (- / ) ^ t · P0 (*)

Regarding this point, Western economist Asima Proulos gives the following examples:

In the United States, due to the severe weather of the storm in 1972, potato production fell sharply, and the price of potatoes rose. As the price of potatoes increased, farmers expanded the area of potato planting, so that potato output reached its highest level in history in 1974. The sharp increase in the supply of potatoes caused the price of potatoes to drop sharply. Taking Maine potatoes as an example, the price of 0.4536 kg of potatoes dropped from 13 cents in May 1974 to 2 cents in March 1975. The average cost of production is still low. This phenomenon can be explained by the cobweb model. As a supplement, Asima gave a special example to illustrate the flaws of the cobweb model: On Prince Edward Island, when farmers are affected by potatoes When the price decreases and the area under which potatoes are planted is reduced, the only farmer does not do this. Because the farmer believes that the price of potatoes will rise based on long-term operating experience, it is time to increase potato production. Expectations and behaviors are inconsistent with those analyzed by the cobweb model. ^[1]