The spider web model predicts the relationship between supply, demand, and price, but it can be flawed if producers don’t act according to rational expectations. The model accounts for time delays in production, but adaptive market expectations can reduce the lag time and affect price levels.
The spider web model is an economic model that tries to predict the relationship between the prices of a given product and the levels of supply and demand for that product. It takes into account that there is no immediate response between supply and demand, because there is a delay in production time. Because this lag exists, it can be difficult to strike a balance between supply and demand levels and the price of the product. So named for the spider’s web pattern it makes on a graph indicating the quantity produced of a particular good and its price, the spider’s web model and its predictions suffer somewhat when producers of a particular good fail to act. according to rational expectations.
Many economic theories are based on simple laws of supply and demand and how price levels respond. If the supply of a certain product drops, it is logical that the demand will be high and the price of the product will increase. On the other hand, oversupply of a product will decrease demand and cause the price to fall.
In reality, the production of any good is not immediate, and the spider’s web model tries to take this time delay into account when making its price predictions. If it takes a year to produce a certain object and there is excess demand for that product, that demand will continue to grow during that year’s period. During that year, prices will continue to rise as supply continues to rapidly decrease.
Once production is ramped up to meet this rising demand, then, according to the spider’s web model, supply not only satisfies demand, but may eventually exceed it. Price levels, in turn, will fall below the level at which they started. Production levels drop in response to this turnaround, supply dwindles once more, and the balance between supply and demand eventually returns.
There is an inherent flaw in the cobweb model that appears when the actions of a product’s manufacturers are taken into account. Most manufacturers will eventually adjust their inventory levels to anticipate increased demand for a given product. This type of behavior, based on adaptive market expectations as opposed to rational expectations, will affect the price level of the product as the lag time can be reduced and manufacturers can respond more quickly to market demands.
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