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  • The Cobweb Model: Econmodel Exercises

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    Mzee Kodia
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    The document summarizes the cobweb model, which challenges the assumption that supply and demand models always converge to equilibrium. The cobweb model features a lagged supply response, where the current period's supply depends on the previous period's price. This can lead to oscillations between high and low prices as an unusually high or low price in one period causes an over- or under-supply in the next. The stability of the cobweb model depends on the slope of the demand curve, represented by the parameter alpha. If alpha is less than -5, the process is stable, but it is unstable if alpha is greater than -5. Exercises are provided to run simulations of the traditional and simultaneous cobweb models and observe how the

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    Original Title

    Cobweb

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    The document summarizes the cobweb model, which challenges the assumption that supply and demand models always converge to equilibrium. The cobweb model features a lagged supply response, where the current period's supply depends on the previous period's price. This can lead to oscillations between high and low prices as an unusually high or low price in one period causes an over- or under-supply in the next. The stability of the cobweb model depends on the slope of the demand curve, represented by the parameter alpha. If alpha is less than -5, the process is stable, but it is unstable if alpha is greater than -5. Exercises are provided to run simulations of the traditional and simultaneous cobweb models and observe how the

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    34 views2 pages

    The Cobweb Model: Econmodel Exercises

    Uploaded by

    Mzee Kodia
    The document summarizes the cobweb model, which challenges the assumption that supply and demand models always converge to equilibrium. The cobweb model features a lagged supply response, where the current period's supply depends on the previous period's price. This can lead to oscillations between high and low prices as an unusually high or low price in one period causes an over- or under-supply in the next. The stability of the cobweb model depends on the slope of the demand curve, represented by the parameter alpha. If alpha is less than -5, the process is stable, but it is unstable if alpha is greater than -5. Exercises are provided to run simulations of the traditional and simultaneous cobweb models and observe how the

    Copyright:

    © All Rights Reserved
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    of 2

    EconModel Exercises

    www.econmodel.com/classic/

    The Cobweb Model


    Introduction
    The Cobweb Model challenges the tendency to assume that a supply and demand
    model obviously converges to equilibrium at the intersection of the two curves. In fact,
    convergence to equilibrium in an economic model may or may not occur.
    The mechanism featured in the Cobweb Model is a lagged response of supply to the
    market price. For example, in an agricultural crop this periods supply might depend on
    the amount planted in the previous period and, hence, the previous periods price. An
    unusually high price in period 1 can lead to a large supply in period 2, which then
    causes a low price in period 2 and smaller amounts planted. The stage is then set for a
    higher price in period 3 and an oscillation between low and high prices.
    Deeper analysis of this process than the simulations here ventures into the issues
    raised by rational expectations. At that level, it is not obvious that farmers who find
    themselves in a cobweb pattern of oscillations would not see that their supply strategy
    leads to systematic mistakes.
    The Model
    The Demand Curve is given by
    P = 2 + ( 20 + QS - 3 Y ) / alpha,
    where the Demand Curve slope alpha determines the stability of the process. If alpha <
    -5, then the process is stable. To the extent that alpha > -5 the process is unstable.
    QS = -10 + beta ( P[t-1] - 2 ) + 2 WX
    The supply curve slope beta is always set to 5.
    The EconModel simulations apply these two equations sequentially in the Traditional
    Cobweb Model case. The resulting process, which takes two periods to go through
    both equations, has the advantage of drawing the traditional cobweb diagram that
    shows the sequential equilibria.
    The Simultaneous Cobweb Model show the oscillations when both adjustments occur
    each period.
    Exercises

    EconModel Exercises

    www.econmodel.com/classic/

    1.

    Run the simulations for the Traditional Cobweb Model and alpha equal to -6.0, 5.0, -4.0, and -3.5. Draw the diagrams for the sequential equilibria.

    2.

    How does the stability of the process depend on alpha?

    3.

    Click on the Home icon to reach the initial title page. Select The Simultaneous
    Cobweb Mode. Run those simulations, which alternate between the upper-left
    and lower-right corners of the previous diagram.

    4.

    Again, how does the stability of the process depend on alpha?

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