The cobweb theory depicts an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets it describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Here, producers, expectations about prices are assumed to be based on observations of previous prices. With respect to agricultural production in Nigeria, with emphasis on maize (corn) as an agricultural produce, the cobweb theory as depicted in the figure below shows the cyclical supply and demand for the produce with quantities produced being chosen before prices are observed.
An unstable cobweb
Conventionally maize crop takes about three months to mature for harvest now, at the beginning of the cobweb, the production and supply of maize in Nigeria was Qo an the price observed in the market was po. At a stage the supply of maize fell from Qo to Q1 and there was a resultant increase in price from Po to P1. This situation prevailed for some time because it was practically impossible to increase the supply of maize in the market since it will require three months to cultivate and harvest maize from the agricultural sector.
When producers of maize realized there has been an increase in the price of maize they felt motivated to cultivate more maize. Even those who were not involved in agriculture felt motivated too, to get involved and partake in the increase in price of maize. As more persons (farmers) cultivate maize, expecting to sell at the prevailing price, some of the consumers became frustrated by the high price of maize and decided to divert their interest form the consumption of maize to the consumption of something else, probably a close substitute. But the farmers have already increase supply of maize. So, during the next harvest, supply increased form Q1 to Q2. at this stage, there was a fall in demand that resulted in a fall in price from P1 to P2. Here, suppliers have already produced the quality they have, and they cannot change the situation. They have no choice but to sell of the new low price of P2.
Having witnessed a fall in the price of maize, many of the farmers now became discouraged in the production of maize. They abandoned the production of the commodity for some other goods which have comparatively higher price. Now, many of the consumers have comparatively higher price. Now, many of the consumers have learnt about the fall in the price of maize and are ready to come back to the demand for maize. So, in the next harvest period, the producers now supply less quality of maize compared to the previous period. Consumers on the other hand, have increased their demand for maize. They were only attracted by the fall in price of maize, but they never know that suppliers have been discouraged by the same fall in price and have decided not to produce large quantity of maize. At this stage, the quantity supplied decreased form Q2 to Q3. now the demand for maize in the market has exceed the supply of maize. In the previous period or time, the reverse was the case. As more people compete to buy the small supply of maize, price begins to rise, moving from a low P2 to a higher P3. The re-emergence of large number of consumers with accompanying increase in demand has led to an increase in the price of maize. Now, many farmers wished they could produce maize and partake in the increase in the price for maize, but the time necessary to produce maize could not allow or permit them to increase supply. Nevertheless they can plan now on how to increase supply in three months time, the time needed to produce maize.
More producers will want to produce more quantities of maize in order to sell at the prevailing price of P3. this will lead to their making plans and taking decisions to increase supply, although this will take three months to actualize. Within this period of three months, consumers have felt the biting effect of purchasing maize at the price of P3. Many of them now decided to purchase some other products that could serve the same or similar purpose. But produce are not aware that consumers would not maintain the same level of demand at that price of P3. After the elapse of the needed three months period, and an increase in the supply of maize form Q3 to Q4, the producers realized that demand could not be sustained at that previous level and at that previous price of P3. Price then fell from P3 to P4, leading to a wish by producers to reduce supply. But they cannot reduce supply at that given moment because they have already produced quantity Q4.
This unexpected fall in price from P3 to P4 on the part of producers caused them to reduce future production. By the next production period, only Q5 quantity of maize is produced. Remarkably, the fall in rice from P3 to P4 in the previous period has led to more consumers returning to demand for maize. At this point, more persons are demanding for maize but only very few quality Q5 is available in the market. This resulted in an increase in the price of this agricultural product from P4 to P5. Thus, the cobweb continued to form, as supply and demand and price continued to fluctuated in response to each other.