The model of the cobweb theory is shown in the figure. In the figure, P, Q, D and S are price, output, demand function and supply function respectively; t is time. According to the above model, the price P1 in the first period is determined by the supply Q1; producers use this price to determine their output Q2 in the second period. Q2 in turn determines the price P2 in the second period. The output Q3 in the third period is determined by the price P2 in the second period, and so on. Due to the different elasticities of demand and supply, changes in price and supply can be divided into three situations:

① When the elasticity of supply is less than the elasticity of demand (that is, the impact of price changes on supply is less than the impact on demand) At that time, the fluctuations in price and output will gradually weaken, and the economic status will tend to be balanced, as shown in Figure 1. When the supply elasticity is less than the demand elasticity, it is the "cobweb stability condition", and the spider web shrinks inward, which is called "convergent spider web". ② When the elasticity of supply is greater than the elasticity of demand (that is, the impact of price on supply quantity is greater than the impact on demand quantity), the fluctuations gradually intensify, moving further and further away from the equilibrium point, and the equilibrium cannot be restored, as shown in Figure 2. When the supply elasticity is greater than the demand elasticity, it is a "cobweb unstable condition", and the spider web is a "divergent spider web". ③When the supply elasticity is equal to the demand elasticity, the fluctuation will continue to cycle, that is, it will not be far away from the equilibrium point, nor will it return to equilibrium, as shown in Figure 3. The equality of supply elasticity and demand elasticity is the "cobweb neutrality condition", and the spider web is a "closed spider web".

Explanation on the cobweb theory

The cobweb theory aims to explain that under the spontaneous regulation of the market mechanism, spider web-shaped fluctuations often occur in the agricultural product market, thus affecting the stability of agricultural production. In real life, the phenomenon of divergent cobweb fluctuations widely exists in agricultural products. In order to eliminate or reduce the cobweb-shaped fluctuations that often occur in agricultural products in the market, there are generally two methods:

(1) The government uses economic policies such as support prices or price restrictions to regulate the market. Intervene;

(2) Use the market's own regulatory mechanism to regulate, that is, use the futures market to regulate.