Cobweb Theory

Discipline: Economics

Named by Hungarian-born economist Nicholas Kaldor (1908-1986), cobweb theory stems from a simple dynamic model of cyclical demand which involves time lags between the response of production and a change in price (most often seen in agricultural sectors).

Cobweb theory focuses on the process of adjustment in markets by tracing the path of prices and outputs in different equilibrium situations. It is so named because its graphic representation resembles a cobweb with the equilibrium point at the center of the cobweb. It is sometimes referred to as the hog-cycle (after the phenomenon observed in American pig prices during the 1930s).

Also see: adaptive expectations

Source:
N Kaldor, 'A Classificatory Note on the Determination of Equilibrium', Review of Economic Studies, vol I (February, 1934), 122-36;
M Nerlove, 'Adaptive Expectations and Cobweb Phenomena', Quarterly Journal of Economics, vol. lxxii (1958), 227-40

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