Introduction to The Cobweb Analysis
Animation 2. Anticipating Next Year's Price
The animation above illustrates the general idea behind the cobweb or "corn-hog cycle." In corn farming (for example), farmers have to decide how much to plant several months before the product goes to market. That's how long it takes the crop to grow. As a result, when they are planting, they don't really know how high a price their crop will bring. They have to estimate the price. According to the cobweb hypothesis, they assume that the previous year's price will continue to prevail.
In the animation, we start with a price of p1. Assuming they will get p1, the supply curve tells us that farmers will plan to produce Q1, and plant accordingly. But, when it comes to market, Q1 of corn will bring a price of only p2. Disappointed, farmers plan their planting for the following year on the basis of a price of p2, planting enough to bring Q2 to the market at the next harvest. And so it goes. Click on "reload" to see the animation again.
Now let's see how this goes over the years --
Why Do We Call It a "Cobweb Cycle?"
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