![Page 1: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/1.jpg)
fig
Suppose we have a crop which takes a year to grow and is grown only once
year,
DA
P1
Q1
P
Q O
a
SAe.g. Hops for Beer
Suppose now that demand were to rise but supply cannot respond immediately
![Page 2: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/2.jpg)
fig
What will happen to Price?
Suppose we have a crop which takes a year to grow and is grown only once
year,
DA
P1
Q1
P
Q O
a
SAe.g. Hops for Beer
Suppose now that demand were to rise but supply cannot respond immediately
![Page 3: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/3.jpg)
fig
So price rises to P2
Since supply is fixed, the price is determined by the available supply at Q1.
DA
P1
Q1
P
Q O
a
DB
P2
SA
![Page 4: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/4.jpg)
• But next period farmers observe that the price of hops was very high
• So now they all want to grow hops
• At P2, what will the supply be?
![Page 5: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/5.jpg)
fig
DA
P1
Q1
P
Q O
a
DB
P2
At P2, the following year supply increases to Q3
Q3
SA
![Page 6: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/6.jpg)
fig
DA
P1
Q1
P
Q O
a
DB
P2
But now Supply exceeds demand so price must fall to P3
Q3
P3
SA
![Page 7: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/7.jpg)
fig
DA
P1
Q1
P
Q O
a
DB
P2
Q3
P3
Q4
But next period farmers see lower price and decide to supply less: Q4
SA
![Page 8: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/8.jpg)
fig
DA
P1
Q1
P
Q O
a
DB
P2
Q3
P3
Q4
Notice here that we are spiraling through time to an equilibrium
This is a stable Cobweb
SA
![Page 9: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/9.jpg)
fig
Suppose instead that the supply curve was very flat.
DA
P1
Q1
P
Q O
a
SA
Now what will happen to Price?
![Page 10: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/10.jpg)
fig
Suppose instead that the supply curve was very flat.
DA
P1
Q1
P
Q O
a
SA
Now what will happen to Price?
![Page 11: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/11.jpg)
fig
Since supply is fixed, again the price must rise to P2
P1
Q1
P
Q O
a
DA
DB
SA
![Page 12: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/12.jpg)
fig
Since supply is still fixed at Q1, again the price must rise to P2
P1
Q1
P
Q O
a
DA
DB
SAP2
But next period farmers observe that the price of hops was very high
So now they all want to grow hops
![Page 13: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/13.jpg)
fig
DA
P1
Q1
P
Q O
a
DB
P2
Now Supply Increases to Q5
Q5
SA
At P2, what will the supply be in this case?
![Page 14: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/14.jpg)
fig
DA
P1
Q1
P
Q O
a
DB
P2
Q5
SA
But again Supply exceeds demand so price must fall to P5
P5
![Page 15: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/15.jpg)
fig
DA
P1
Q1
P
Q O
a
DB
P2
Q5
SA
But at P5 next period farmers decide to supply Q6
P5
Q6
![Page 16: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/16.jpg)
fig
DA
P1
Q1
P6
Q O
a
DB
P2
Q5
SA
But if only Q6 is supplied demand will exceed supply and price will rise to P6
P5
Q6
![Page 17: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/17.jpg)
fig
DA
P1
Q1
P6
Q O
a
DB
P2
Q5
SA
P5
Q6
But Now the price and quantity are gradually spiraling away from equilibrium. This is an unstable cobweb.
![Page 18: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/18.jpg)
Summary of Cobweb Effects
• With a demand SHIFT and supply fixed yearly, a sudden rise in demand will see a big increase in income.
• The lagged response next year can generate cyclical fluctuations in prices over the next few years.
• When Q goes up and P fall, income PxQ can also fluctuate.
• Not all cobwebs are stable
![Page 19: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/19.jpg)
fig
Supply Side Shock
D
PE
QE
P
Q O
e
LRS
LRS is the long-run supply curve.
SRSE is the expected supply this year.
SRSE
PA
QA
SRSA
SRSA is the actual supply this year. e.g. Bad harvest
![Page 20: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/20.jpg)
fig
Supply Side Shock
D
PE
QE
P
Q O
LRS
So price rises, what about income?
PEeQEO=ab is expected income
SRSE
PA
QA
SRSA
ac= actual income
Overall depends on size of c relative to b
e
a
b
c
![Page 21: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/21.jpg)
fig
Supply Side Shock
D
PE
QE
P
Q O
LRS
If demand is more inelastic, c>b and income rises.
SRSEPA
QA
SRSA
ac= actual income
Overall depends on size of c relative to b
e
a
b
c
![Page 22: fig Suppose we have a crop which takes a year to grow and is grown only once year, DADA P1P1 Q1Q1 P Q O a SASA e.g. Hops for Beer Suppose now that demand](https://reader036.vdocuments.us/reader036/viewer/2022062423/5697bf7c1a28abf838c84152/html5/thumbnails/22.jpg)
fig
Supply Side Shock
D
PE
QE
P
Q O
LRS
But if it is a good crop and demand is inelastic,
SRSE
PA
QA
SRSA
c < b and income falls
So variability in incomes leads to pressure for government intervention
e
a
b
c