Cobweb theory in micro economics

Answer 1

Cobweb theory in microeconomics illustrates how prices and quantities in a market can fluctuate over time due to lagged responses of producers to price changes. When prices rise, producers increase output, but there is a time lag in production. As a result, the increase in supply may lead to a fall in prices, causing producers to reduce output, which can create oscillating cycles of boom and bust in the market. This phenomenon is often observed in agricultural markets where production decisions are based on past prices.