Elements of Numerical Mathematical Economics with Excel

4.4. Cobweb model of price adjustment and other economic models with difference equations

Cobweb model (price adjustment model in a perfect competitive market)

One of the most studied applications of the phase diagrams and difference equations to economics is the cobweb model of price adjustment, typically applied within the flex-price perfect competitive markets, namely within those primary sector markets (e.g., commodity markets) where the price adjustment is typically determined by the interaction of supply and demand. The first articles about this model were written by the British economist Nicholas Kaldor (A Classificatory Note on the Determination of Equilibrium, 1934) and by the American agrarian economist Mordecai Ezekiel (The ...