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Construct a diagram to show a convergent cobweb. What are the key factors that determine if the cobweb is convergent or divergent?
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A convergent cobweb reflects a situation when price and quantity fluctuate in the long run due to expectations but eventually converge to the equilibrium price. A divergent cobweb on the other hand reflects a situation when price and quantity fluctuate due to expectations but instead of approaching equilibrium they constantly move further and further away from it. We observe the phenomenon of a cobweb in perfect competition when the assumption of perfect foresight is relaxed. A convergent cobweb is observed when demand is more elastic than supply whereas a divergent one is observed when demand is more inelastic than supply....
are sensitive to price changes the quantity demanded will still change even for small variations in output. At the same time given that supply is relatively inelastic quantity can't change by large margins so producers are forced to push their production towards the equilibrium point. On the other hand when supply is more elastic than demand producers have the capability to increase production according to expectations and producers are relatively insensitive to price changes so even at rather large increases in price they won't reduce consumption by as much as they would had they been sensitive to price changes.
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