Cobweb model, Microeconomics

Assignment Help:

COBWEB MODEL:

Concept of dynamic stability: A market equilibrium is said to dynamically stable only when disequilibrium price and quantity move and over time reach to any equilibrium, otherwise it is dynamically unstable. Movement of price and quantity in disequilibrium over time depends on behaviour of the market. Hence, analysis of dynamic equilibrium and stability depends on behavioural assumption of the market. Dynamic analysis is of two types. Here we consider discrete time analysis. Below we discuss Cobweb model in details.  

Cobweb model analyses dynamic equilibrium and stability of a competitive market with the following behavioural assumptions: 

•  We consider linear demand and supply functions for simplicity.  

 

•  Both demand and supply functions depend on time, where time is a discrete matter (in that sense it is a dynamic model). 

•  Supply quantity at any time, t, depends on previous period's price and             

                  St = c +d Pt-1  ------------------ (i)  

But demand quantity at any time, t, depends on the price at that time      

 Dt = a + b Pt    ----------------- (ii) 

That means demand quantity is instantaneously determined at the existing price but there is a lag in supply quantity with respect to price since supply of output requires some amount of time. 

•  Behaviour of the market is such that as soon as supply quantity comes into the market, entire quantity is demanded at that period by adjusting price so that market is clear in each period. Thus, at any time,

t, St = Dt  ----------------(iii) 

Since demand and supply functions are linear, a, b, c and d are constant. On the basis of these we now analyse dynamic equilibrium and stability. 


Related Discussions:- Cobweb model

#syndicated oligopoly, Could I have examples of syndicated and organized ol...

Could I have examples of syndicated and organized oligopolies with companies as examples

What is hyper inflation, What is hyper inflation? How it can be reduced?  ...

What is hyper inflation? How it can be reduced?   Hyper inflation means that prices of the consumable goods are very high. Prices can be decreased by supplying more goods in th

Production, what is fixed and variable inputs with more explanation

what is fixed and variable inputs with more explanation

Total sales of industry, The sales of a company are the part of the total s...

The sales of a company are the part of the total sales of industry. If the conditions of industry changes then the sales of each of the firm in the industry is affected. All teh ti

Find the monopsony first mover competitive fringe buyer, Draw the suitable ...

Draw the suitable graph for each situation and describe a real world situation in health care in which the market structure utilized in the question may exist. Demand: P=6,000-0

Economics and potlatch, I have 3 questions regarding the economics of potla...

I have 3 questions regarding the economics of potlatch, 1.) What is the economic purpose of potlatch? I don''t fully understand this question... I believe potlatch is a gift econ

Variability, Variability - The extent to which the possible outcomes of...

Variability - The extent to which the possible outcomes of uncertain event may vary * Variability: A Scenario - Assume that you are choosing between two part time sales

Common property resource management, Normal 0 false false f...

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Composite goods, what is the effect on the market for dvd players if the pr...

what is the effect on the market for dvd players if the price of dvd rises

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd