The 'Cobweb Theorem' explains why agricultural markets often experience cyclical fluctuations in prices and quantities, due to the time lag between planting decisions and the actual harvest.
- True
- False
Answer: True
Farmers base their planting decisions on current market prices. If prices are high today, they plant more, leading to a massive oversupply and price crash at harvest time. Seeing low prices, they plant less the next season, causing a shortage and price spike. This delayed supply response creates a continuous, spiraling 'cobweb' pattern of boom and bust in agricultural commodity prices.