Question

The cobweb model of adjustment and why it might be relevant for certain types of labor markets and which types those are

Answer 1

Cobweb models are used to explain irregular fluctuations in prices that eventually lead to fluctuations in supply and a cycle of rising and falling prices which is characteristic of certain markets. The key factor in such models is time- the process by which expectations of prices adapt, determines the fluctuations in prices and quantities( based on time lag between supply and demand decisions). It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producers' expectations about prices are assumed to be based on observations of previous prices.

For example, labour markets in agriculture can be modelled using the Cobweb theory since there is a lag between planting and harvesting. This means farmers decide the quantity to be produced, even before prices are observed. Their expectations about prices are based on values observed in the past. Other examples of markets where this model is relevant could be markets for food production, commodity markets or any market characterized by lags in production.