Cobweb Theorem

Cobweb model (know as Hog Cycle) is a dynamic analysis which provides an explanation for certain types of cyclical behaviours due to regular fluctuation in price and output.

This model, as most other economic models, is based on some assumptions. It assumes that prices are determined by current prices i.e. farmers expect that the future price will be the same as the present ones. This is known as the ‘Naïve Expectation’. This assumption is considered to be unrealistic since prices might fluctuate due to unplanned variations, which might effect output such as weather and disease. The model also assumes that there is a one period time lag in production response. In Cobweb model a cycle duration is assumed to be 2 multiplied by a production lag. However, in reality this is too short, therefore we observe cycles, which are 4 multiplied by production lag.

There are three types of cobweb cyclical process: continuous, converging and diverging cobwebs. Figure (1) shows a continuous...