Cobweb Model, explained.
The cobweb model describes price oscillations created when supply responds to an earlier price while demand responds to the current market.
Why it happens
A high past price encourages supply; that larger supply can lower the next price, which then reduces later supply. Whether this alternation shrinks or grows depends on the relative response strengths.
Delayed supply responses can create oscillating prices. Stability depends on the relationship between supply and demand responses.
Read the result
Change the response ratio around one. Below one the deviation shrinks, at one it repeats, and above one it grows. The chart measures deviation from equilibrium, so a negative value means below balance rather than a negative selling price.
A worked example
A damped response
Start one unit above equilibrium with response ratio 0.7.
The next deviations are −0.7, +0.49 and −0.343.
Alternating signs show overshoot, while decreasing magnitudes show convergence under the stipulated linear response.
OPTIONAL DEEPER DETAILGo deeper: inside the model
Inside this model
The linearized deviation obeys x(t+1)=-r*x(t), starting at 1. Response r below one dampens, r=1 repeats, and r above one amplifies. The chart shows deviations, not literal negative prices.
Where this idea is useful
A practical use
Planting based on the last harvest’s price can produce too much supply when the next harvest arrives.
A common misconception
“Oscillation always indicates an unstable system.”
An oscillating system can converge if the deviations shrink. Distinguish direction changes from increasing amplitude.
What this explanation leaves out
- This is a linear local model with naive expectations. It omits storage, forecasts, shocks and nonlinear price bounds.
What makes the delay important?
Production follows the previous signal, so the supply decision can be out of step with the market it later enters.
Which decisions in your system respond to information that may already be out of date?
Further reading
Explore the original research or the teaching reference behind this experiment.