Cobweb model
It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed.
The cobweb model is generally based on a time lag between supply and demand decisions.
Suppose for example that as a result of unexpectedly bad weather, farmers go to market with an unusually small crop of strawberries.
This shortage, equivalent to a leftward shift in the market's supply curve, results in high prices.
If farmers expect these high price conditions to continue, then in the following year, they will raise their production of strawberries relative to other crops.
The convergent case requires that the slope of the (inverse) supply curve be greater than the absolute value of the slope of the (inverse) demand curve: In standard microeconomics terminology, define the elasticity of supply as
One reason to be skeptical of this model's predictions is that it assumes producers are extremely shortsighted.
[2] Eino Haikala has analyzed Ezekiel's work among others, and clarified that time constitutes the axis of the screw-shape.
[3] Thus Martin and Schumann point out that the cobweb theorem works to worsen standards of living as well.
The idea of expectations-variation and thus modeled and induced expectations is shown clearly in Oskar Morgenstern's Vollkommene Voraussicht und Wirtschaftliches Gleichgewicht.
[4] This article shows also that the concept of perfect foresight (vollkommene Voraussicht) is not a Robert E. Lucas or rational expectations invention but rests in game theory, Morgenstern and John von Neumann being the authors of Theory of Games and Economic Behavior (1944).
This does not mean that the rational expectations hypothesis (REH) is not game theory or separate from the cobweb theorem, but vice versa.
In Martin and Schumann's context, a claim that anti-Keynesian policies lead to a greater welfare of the majority of mankind should be analyzed in terms of truth.
This is contrary to the principles of REH, where the measure of policies is an economic model,[7] not reality, and credibility, not truth.
The importance of intellectual climate emphasized in Friedmans' work[8] means that the credibility of a prediction can be increased by manipulating public opinion, despite its lack of truth.
Nicholas Kaldor's work The Scourge of Monetarism is an analysis of how the policies described by Martin and Schumann came to the United Kingdom.
The increasing population, financing methods, higher income, and investment needs converged and came to be reflected through the skyrocketing demand for housing.
On the other hand, technology, private and public entrepreneurship, the housing inventory and the availability of workforce have converged on the supply side.
The position and direction of the housing sector in the business cycle can be identified by using a cobweb model.
