DYNAMICS OF THE COBWEB MODEL WITH ADAPTIVE EXPECTATIONS AND NONLINEAR SUPPLY-AND-DEMAND

The price-quantity dynamics of the cobweb model with adaptive expectations and nonlinear supply and demand curves is analysed. We prove that chaotic dynamical behaviour can occur, even if both the supply and demand curves are monotonic. The introduction of adaptive expectations into the cobweb model leads to price-quantity fluctuations with a smaller amplitude. However, at the same time the price-quantity cycles may become unstable and chaotic oscillations may arise. We present a geometric explanation why chaos can occur for a large class of nonlinear, monotonic supply and demand curves.