Cobweb Model

# Cobweb Model - T he Cobweb Model o f M arket Adjustment as...

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The Cobweb Model of Market Adjustment as an Application of Difference Equations A simple model of market adjustment frequently studied in microeconomics can be formulated and solved in terms of a first-order difference equation. Consider the standard case of supply and demand for a particular good X It is generally assumed that demand for and supply of this good can be specified as given functions of the price P of the good: D=D(P) and S=S(P). A static-equilibrium price, and a corresponding stationary-state price level, are defined by the equilibrium condition that demand and supply are equal under the given conditions. An equilibrium price P is any value satisfying D(P) = S(P) , provided that P ~ 0 . We now introduce time and consider how such an equilibrium state might be brought about in a market not in equilibrium. Assume that demand and supply schedules, D and S, are fixed in all periods (are not shifting up or down). This assumption would be reasonable if

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