Cobweb Theorems with Production Lags and Price Forecasting

Abstract

The classical cobweb theorem is extended to include production lags and price forecasts. Price forecasting based on a longer period has a stabilizing effect on prices. Longer production lags do not necessarily lead to unstable prices; very long lags lead to cycles of constant amplitude. The classical cobweb requires elasticity of demand to be greater than that of supply; this is not necessarily the case in a more general setting, price forecasting has a stabilizing effect. Random shocks are also considered.

Keywords: Cobweb theorem, production lags, stable markets, price fluctuations

JEL Classification: C02, C62, C65, D58, E32