Supply Models: The Nerlovean Response Model
One of the most widely used supply models has been the Nerlovean response model based on adaptive expectations hypothesis. The model was developed by Nerlove in 1958. The model endeavours to analyse the speed and adjustment level of actual acreage towards the desired level. The short and long-run elasticities of supply response with respect to changes in expected prices is estimated by the model. According to Nerlove (1958) as cited by Tchereni and Tchereni (2013) the model argues that producers respond to expected prices as opposed to actual prices and acreage response follows a partial adjustment hypothesis which means that full adjustment to desired cultivated area may not be possible in the short-run such that actual adjustment to area …show more content…
Cobweb model based The cobweb model or cobweb theory is 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. Producers' expectations about prices are assumed to be based on observations of previous prices. Nicholas Kaldor analyzed the model in 1934, coining the term 'cobweb theorem' (Kaldor, 1938; Pashigian, 2008). The cobweb model is based on a time lag between supply and demand decisions. Agricultural markets are a context where the cobweb model might apply, since there is a lag between planting and harvesting (Kaldor, 1934; Econmodel, 2013). The mechanism featured in the Cobweb Model is a lagged response of supply to the market price. For example, in an agricultural crop this period’s supply might depend on the amount planted in the previous period and, hence, the previous period’s price. An unusually high price in period 1 can lead to a large supply in period 2, which then causes a low price in period 2 and smaller amounts planted. The stage is then set for a higher price in period 3 and an oscillation between low and high prices. However a deeper analysis of this process than the simulations here ventures into the issues raised by rational expectations. At that level, it is not obvious that farmers who find themselves in a cobweb pattern of oscillations would not see that their supply strategy leads to systematic
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