For instance, when prices are high in one season, producers may respond by increasing supply, expecting similar profitability. By the time this increased supply reaches the market, prices may fall due to oversupply, leading to reduced profitability. In response, producers may cut back on supply in the next cycle, potentially causing prices to rise again. This alternating pattern can create a cyclical fluctuation in prices and production levels, forming what is known as the cobweb cycle.
The cobweb model can be classified into three types: convergent, divergent, and continuous cycles. In a convergent cycle, the oscillations in prices and quantities gradually stabilize over time. In a divergent cycle, the fluctuations grow larger and lead to market instability. In continuous cycles, the price and quantity oscillations persist indefinitely without stabilization. The outcome depends on the elasticity of supply and demand. If demand is more elastic than supply, the cycle tends to converge, while if supply is more elastic than demand, it may diverge.
While the cobweb cycle provides a simplified framework for understanding price and quantity fluctuations, it has limitations. The model assumes that producers are naive and base decisions solely on past prices, without considering future expectations or external factors like technological advancements, policy changes, or global market trends. Despite its limitations, the cobweb theory remains a valuable tool for analyzing market behaviors, particularly in industries with significant production delays and price volatility.