In the basic model of supply and demand, the price adjusts so that the quantity supplied and the quantity demanded are equal. The precise mechanism that achieves this equilibrium is not always explicit.

**The Cobweb Model**
shows how achieving a supply and demand equilibrium might be so
automatic if, as seems reasonable, the suppliers set the price and the
consumers react with a quantity demanded. For some slopes of the demand and
supply curves, the equilibrium can be unstable.

The Cobweb Model is the classic demonstration that dynamic behavior by economic agents might not converge to a stable equilibrium with supply equal to demand. This application provides two ways to graph the outcome and lets you experiment with the key parameter that determines whether the outcome is stable or not.

**Movie:** **The Cobweb
Model** (1 min, 34 seconds)

**The
Cobweb Model****Model
Link **(The **
Getting Started** page

explains how to activate the model links.)**Exercises** (printable pdf)

**The Inventory-Based Pricing Model** relaxes the assumption that supply
must equal demand to consider how maintaining an inventory might moderate
the possible instability. Retail stores, for example, very often buy
an inventory, set a price, and then wait to see what demand might be.

The Inventory-Based Pricing Model illustrates that the Cobweb Model might or might not be a realistic challenge to supply and demand equilibrium. Introducing an inventory buffering the difference between supply and demand and letting prices respond to the level of the inventory can be sufficient to eliminate the instability observed for the basic Cobweb Model.

**The
Cobweb Model****Model
Link **(The **
Getting Started** page

explains how to activate the model links.)**
Exercises** (printable pdf)

**Classic
Economic Models**

**Microeconomics**

**Introduction**

Overview of Micro Models

**Supply and Demand**

Basic Supply and Demand

Who Pays a Sales Tax?

The Cobweb Model and

Inventory-Based Pricing

**Theory of the Firm**

Perfect Competition

Monopoly and

Monopolistic Competition

Price Discrimination

The Demand for Labor

**Theory of the Consumer**

Two Goods - Two Prices

Intertemporal Substitution

Labor Supply, Income Taxes,

and Transfer Payments

**Macroeconomics**

**Introduction**

Overview of Macro Models

**Models in Chronological Order**

The Classical Model

The Simple Keynesian Model

The Keynesian IS/LM Model

The Mundell-Fleming Model

Real Business Cycles

The IS/MP Model

The Solow Growth Model

**Financial Markets
**
Utility-Based Valuation of Risk

Mean-Variance Analysis:

Risk vs. Expected Return

Fixed Income Securities:

Mortgage/Bond Calculator

Growth Investments:

Present Value Calculator

**Resources**

** **