Hungarian economist Nicholas Kaldor had proposed the idea of Cobweb cycle in 1934.
What is cobweb cycle in economics?
- This refers to a phenomenon where the prices of certain goods witness fluctuations that are cyclical in nature.
- It happens due to faulty producer expectations.
- Such cyclical price fluctuations are more severe in markets where speculators are banned from hoarding goods to sell them later at a higher price.
Example of cobweb cycle:
- For example, the producers of agricultural goods, might decide to increase their output one year because their product commanded a very high price the previous year.
- This might lead to overproduction and cause prices to slump that year, leading to losses.
- This then discourages the production of such agricultural goods and might lead to high prices (due to low production), which then proves as an incentive for farmers to grow that product in following year.
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