Cobweb theory

Cobweb theory explains why prices in certain markets are subject to periodical fluctuation.

The classic example is that of the market for agricultural goods, such as the market for strawberries: As a result of good weather, the strawberry crop is very good and strawberry farmers go to market with many strawberries. This unusually high supply, equivalent to a rightward shift in the market's supply curve, results in low prices. Therefore, the following year, farmers will reduce their production of strawberries in favor of other goods. When they go to market, the supply will then be low, equivalent to a leftward shift in the supply curve, resulting in high prices. Thus, the following year, farmers will increase their production of strawberries and then find that when they go to market, prices are low.

This cycle will continue to repeat in one of three ways. Fluctuations may become more and more drastic, and so a plot of the equilibriums in each period over time would look like an outward spiral. Alternatively, fluctuations may become less and less drastic, and so a plot of the equilibriums in each period over time would look like an inward spiral. Or, fluctuations may remain constant, and so a plot of the equilibriums would produce a simple; this scenario is unlikely in the short to medium term. In either of the first two scenarios, the combination of the spiral and the supply and demand curves often looks like a cobweb, hence the name of the theory.

The cobweb theory was identified by the Hungarian economist, Nicholas Kaldor. It is sometimes called the hog-cycle, which refers to the fluctuation of American pig prices in the 1930s.