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Convergent, Divergent, Continuous Cobweb

Convergent, Divergent, Continuous Cobweb
  • Convergent Cobweb

  • In the Cobweb theorem, the supply function is denoted as St = S(t-1) and the demand function is denoted as Dt = D(P). The market equilibrium will be when the amount supplied equals the amount demanded that is St = Dt. In any market in which manufacturers' present supply is in retort to the price during the previous year, equilibrium can be ascertained only through a sequence of adjustments that take place over numerous successive time. Let us consider cultivation of sugarcane while the manufacturers crop once a year. Based on the number of canes they are going to produce current year assuming that the prices of this year is equal to the previous year's. The Demand and Supply curves for sugarcane are denoted as D and S respectively as depicted in the Picture (1). The price in the previous year was OP and the manufacturers decide the equilibrium output OQ in the current year. But the crop is damaged due to a disease and that their current output is OQ1 which is smaller than the equilibrium output OQ. Due to this situation the price rise which is OP1 this year. In the subsequent year, sugar cane manufacturers will grow OQ2 amount corresponding to the higher price OP1(=Q1b). Since this is more than what is expected in the market the price is lowered that is OP2 (=Q2d). The manufacturers' plans are deviated and hence the supply is reduced that is Q3 in the third consecutive year but this is lesser to the equilibrium volume OQ. So Price is raised to OP3 (=Q3f) which in turn will encourage manufacturers to manufacture volume OQ. Based on these mix, the equilibrium exists in the point g. The sequence of adjustments are denoted as a, b, c, d, e and f. This type of Convergent Cobweb is called Dynamic Equilibrium with insulated adjustment.

  • Divergent Cobweb

  • There may be an unbalanced cobweb when price and volume changes move away from the equilibrium point. This is shown in the Picture (2). Presume from the original price-volume equilibrium condition of OP and OQ there is a provisional commotion that causes productivity to fall to OQ1. This elevates the prices to OP1 (=Q1a). The amplified price, in turn elevates productivity to OQ2 which is more than equilibrium productivity OQ. As a result the prices fall to OP2. But the price demanded OQ2 surpasses the supply OQ3. As a consequence the price goes up to OP3 (=Q3e) and the adjustment of producers' to this price goes away from the equilibrium.

  • Continuous Cobweb

  • The cobwebs may be constant intensified with continually fluctuating prices and volume as given in the Picture (3). In the event if the price in the current year is OP, the volume to be supplied is OQ1. In order to sell this productivity, the price in the subsequent year will be OP1. But in this price model, the volume demand OQ1 is more than the supply OQ which will raise once again the price to OP (=Qb). In this way, prices and quantities will move in a circle with fluctuations of constant intensified around the equilibrium point e.
Importance of Economic Statics

Economic static provides an imaginary model of the economic phenomena in a state of rest which helps to understand the consequences of certain changes. In this type, the variations in demand and supply affects prices can be only understood when they are in the state of equilibrium. The performance of individual concerns, business units and clients to the real world is applicable by providing a little of dynamic essence and thus it helps in investigating. The study of comparative statics is possible with a position of equilibrium with that of another. It helps in solving complex problems by a mixture of output possibilities and thus producers' satisfaction in profit making is effected.

Limitations of Economic Static

It has the disability of showing the reality. It imagines certain economic variables like production, preferences, inhabitants etc as constants. All that is told in static economy is based on laws and it eliminates the influences of external factors and is thus related to a closed economy.

Importance of Economic Dynamic

The economic dynamic possesses great significance in theory and practice. It is realistic and the cause and effects of changing economic phenomena and facilitates us to witness a moving picture of the functioning of an economy – how the economy grows in a period out of the proceeding period. It is the study of changing positions of equilibrium and not just studying of equilibrium. Hence dynamic investigation relates to the problem of stability of equilibrium. Some of the exertions of classical economics provide themselves to dynamic analysis. The problems of economic growth are analysed with the use of dynamic relationships.

Limitations of Economic Dynamics

Inspite of having optimistic role, the dynamic model has also got its limitations. It is an intricate method, which needs more cautioned usages. So many controversies have risen between the economists in relation to the economic variables that are used by the theoreticians. For instance, the economist Knights regards his theory of profit as belonging to the realm of dynamics, whereas Harrod envisages it to lie in the field of statics. Akin disparities are to be found in the elucidation of Keynes General Theory. It lacks favourable conditions. The economic data are merely prescribed entities whose specific properties cannot be measured for building a theoretical science of economic dynamics. To conclude, the tendency towards economic model building has made economics complex and tricky for an average economic student. This has formed misgivings as to realistic efficacy of economic dynamics.

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