The cobweb model explains cyclical price fluctuations when producers must make supply decisions before observing the market price.
It is especially useful for agricultural markets, where planting, breeding, or production takes time. If a poor harvest causes prices to rise, producers may respond by expanding output. When that larger supply reaches the market, prices can fall, encouraging reduced production in the next period and creating another price increase.
Nicholas Kaldor analyzed the model in 1934 and coined the term “cobweb theorem.” The name comes from diagrams in which successive price and quantity combinations can form a cobweb-like spiral around equilibrium.
Depending on the relative slopes or elasticities of supply and demand, fluctuations may converge toward equilibrium, diverge away from it, or remain constant. The model is simplified because producers may use several years of price information rather than reacting mechanically to only the previous period’s price.