The economic model explaining cyclical price fluctuations when producers base current output on the previous period’s price is the cobweb model.
The model describes markets in which production decisions must be made before the resulting market price is known. Producers use a past price as a guide, often assuming that a recent high price will continue. That encourages greater output, which can create a surplus and push the next price down. Producers then reduce output, creating a shortage and a subsequent price rise.
Depending on the relative slopes or elasticities of supply and demand, the cycle may converge toward equilibrium, maintain a constant amplitude, or diverge with increasingly large fluctuations. Agricultural markets, especially livestock and crops, are classic examples because production takes time.
Nicholas Kaldor analyzed the model in 1934 and popularized the term “cobweb theorem.” A common mistake is to treat the model’s expectations as fully realistic: actual producers may consider several years of prices, costs, inventories, and other information. That criticism is why the cobweb model is best understood as a simplified framework for studying delayed supply responses.