Cobweb Theory (or Cobweb Model) is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices, generally based on a time lag between supply and demand decisions. In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. A key determinant of supply will be the price from the previous year. Nicholas Kaldor analysed the model in 1934, coining the term "Cobweb Theorem", citing previous analyses in German by Henry Schultz and Umberto Ricci.
Related Definitions in the Project: The Commercial Definitions
