Professional Documents
Culture Documents
Government College University Lahore
Government College University Lahore
‘’Cobweb model is an economic model that explains why prices might be subject
to periodic fluctuations in certain types of markets.’’
Example 1:
Consider the following cobweb model (the notations having their usual meanings):
Find the time-path of Q and analyse the conditions for its convergence.
Solution:
The equations for the given model are:
We need to find the time path for Q and analyse the conditions for its convergence:
In equilibrium:
Pt = Pt -1= 𝑃̅ (Equation 5)
-β(𝑃̅-Pt) = ẟ(𝑃̅-Pt-1)
-β𝑃̂t= ẟ𝑃̂t-1 (Equation 7)
From equation 7:
Where A = - ẟ /β = negative.
𝑄̂ 1= A𝑄̂ 0
𝑄̂ 2 = A𝑄̂ 1=A2𝑄̂ 0
𝑄̂ 1 =A1𝑄̂ 0
Equation 16 gives us the solution of the difference equation 15 and this solution, i.e., 16 is the
time path of Q.
Since A=negative, the deviation of output from equilibrium output, i.e., 𝑄̅ -Q=𝑄̂ would alternate
in sign in the successive periods. If 𝑄̂ 0<0, then 𝑄̂ 1 would be positive, 𝑄̂ 2 would be negative, and
so on.
The time-path would convergence if IAI < 1, for then, as t increases. 𝑄̂ t diminishes. So the
condition for convergence for the time-path is: IAI<1 ; ẟ /β<1; S<β, i.e., the numerical slope of
the supply function equation 3 should be less than the numerical slope of the demand function
equation 2 , i.e., the supply function should be flatter than the demand function.
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