COBWEB CYCLE

in economics, fluctuations occurring in markets in which the quantity supplied by producers depends on prices in previous production periods. The cobweb cycle is characteristic of industries in which relatively large time lapses occur between the decision to produce and the finished product and is thus most commonly found in agricultural markets. The lag in the adjustment of supply to demand is demonstrated in the accompanying figures. The demand curve DD reflects the quantities consumers are willing to buy at various prices, and the supply curve SS reflects the quantities producers will choose to supply in view of various prices. In the accompanying example, if OQ1 is the quantity produced in the first period, the price as determined by the demand for the product will be P1. In response to this high price, suppliers will decide to produce P1B2 during the second period. With this increased quantity, however, the price that consumers are willing to pay falls to P2. Responding to this price decrease, producers decide to produce less in period three. If the quantity produced is P2B3, consumers will bid the price up to P3. The cycle continues in this way. The cobweb cycle will converge toward the intersection of the two curves if the slope of the supply curve is greater than that of the demand curve. If it is less, price-quantity combinations will move farther and farther from this point. If the slopes are equal, a constant cobweb cycle results.