Can You Explain Cobweb Theorem?


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Muhammad Abdullah786 Profile
Basically, the market model of competitive economy suggests that the price is settled by the forces of demand and supply. But this is not always true because the prices and outputs of some goods show some cyclical fluctuations over the long periods of time. As price move up and down in waves, the quantities also move up and down in the counter waves. Such fluctuation in rises and outputs are called cobweb fluctuations. To observe them cobweb theorem is presented in different versions.
Demand is the function of current prices and it represented by the usual demand function Qdt = f (Pt) where t represent the time period. The standard demand function is
Qdt= a- bPt.

The supply function is a lagged function, because it is assumed that the supply of the product depends upon the price of previous period. Hence, the supply function is represented as Qst = f (P t-1) where t-1 represents the last period. The standard supply function is Qst = a+bPt-1.In the model it has been assumed that nothing remains unsold and nobody remains unsatisfied because Qd = Qs or Qd – Qs = 0.So convergent to one point if the demand curves is more elastic than the supply curve or absolute slope of supply curve is less than absolute slope of demand curve.

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