11 markets for capital and natural resources l.jpg
Sponsored Links
This presentation is the property of its rightful owner.
1 / 37

11. Markets for Capital and Natural Resources PowerPoint PPT Presentation

  • Updated On :
  • Presentation posted in: General

11. Markets for Capital and Natural Resources. Financial markets Natural Resource markets. Financial Markets. Demand for financial capital Supply of financial capital interest rate financial capital = loanable funds. Demand for Financial capital.

Download Presentation

11. Markets for Capital and Natural Resources

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript

11 markets for capital and natural resources l.jpg

11. Markets for Capital and Natural Resources

  • Financial markets

  • Natural Resource markets

Financial markets l.jpg

Financial Markets

  • Demand for financial capital

  • Supply of financial capital

  • interest rate

  • financial capital = loanable funds

Demand for financial capital l.jpg

Demand for Financial capital

  • firms demand funds to finance capital purchases

  • higher interest rate, more expensive to borrow

    • lower Q demanded of funds

Slide4 l.jpg

interest rate


Q funds

Shifts in demand for funds l.jpg

Shifts in demand for funds

  • population growth

    • increase demand for goods,

    • increase demand for capital,

    • increase demand for funds

Slide6 l.jpg

  • technology

    • increase demand for new capital,

    • increase demand for funds to finance it

Slide7 l.jpg

  • Government borrowing

    • Federal gov’t deficits shift demand to the right

Supply of financial capital l.jpg

Supply of Financial capital

  • people’s savings decisions

    • tradeoff between consuming today & consuming tomorrow

      • Time preference

  • higher interest rates

    • encourage saving

    • higher opportunity cost of current consumption

    • higher Q supplied of funds

Shifts in supply of funds l.jpg

Shifts in supply of funds

  • population

    • higher population, more saving

    • supply shifts right

  • income

    • higher income, more savings

    • supply shifts right

Slide10 l.jpg

  • expected future income

    • save today based on future needs

      -- retirement, college

    • save to smooth consumption over time

    • expect income to rise

      -- save less today, supply falls

    • expect income to fall

      -- save more today, supply rises

Financial market equilbrium l.jpg

interest rate




Q funds


Financial market equilbrium

Natural resource markets l.jpg

Natural Resource markets

  • renewable resources

    • land, forests, livestock

  • nonrenewable resources

    • fossil fuels, metals

Market for land l.jpg

Market for land

  • supply is fixed for type or location

    • perfectly inelastic

Slide14 l.jpg





Q land


Economic rent l.jpg

economic rent

  • rent for land is special

    • land is available even if rent=0

    • demand affects P, not Q

  • economic rent

    • rent above what is required to induce Q supplied of factor

Slide16 l.jpg



economic rent



Q land


Slide17 l.jpg

  • Pure economic rent

    • Income earned by resource with a perfectly inelastic supply

Economic rent18 l.jpg

Economic Rent

  • amount of resource earnings ABOVE opportunity cost

  • or

    resource earnings – minimum required earnings

  • “gravy”! “bonus”!

Example shaquille o neal l.jpg

example: Shaquille O/Neal

  • 2000: $35 million

  • what is minimum for which he would play basketball and endorse stuff?

    • suppose $1 million

  • economic rent: $34 million

When do resources earn rent l.jpg

when do resources earn rent?

  • less elastic (more inelastic) the supply,

    • more rent as a % of total earnings

Differential rent l.jpg

Differential rent

  • Rents earned to superior units of a resource

    • Where quality of resource affects productivity

  • Examples

    • Highly fertile farmland

    • Highly skilled trial lawyer

Inframarginal rent l.jpg

Inframarginal rent

  • Total rent when units of resource differ in their opportunity costs

  • What causes differences?

    • Differences in objectives

    • Differences in constraints

Examples l.jpg


  • Nursing

    • Find the work rewarding

    • Other constraints in the job market

  • Teaching summer school

    • Presence of small children

    • Children in college

Slide24 l.jpg

P res.




Q res.


upward-sloping supply

earnings split




Supply of nonrenewable resource l.jpg

Supply of nonrenewable resource

  • at point in time Q is fixed

  • but over time

    • use

      -- decrease supply

    • new discoveries

      -- increase supply

    • technology for better use

      -- decrease demand

Example metals l.jpg

example: metals

  • nonrenewable resource

  • discover new sources

  • use substitutes (plastic)

  • Recycling technology

Market guided conservation l.jpg

Market-guided conservation

  • Markets have built-in incentives for efficient resource use

  • If a resource becomes scarce

    • Prices rise

      • Copper is up 50% in 2006

Slide28 l.jpg

  • If prices rise

    • People use less (conserve)

    • People substitute

    • Firms look for new sources

    • Firms look for alternatives

Problems with markets nonrenewable resources l.jpg

Problems with markets & nonrenewable resources

  • Externalities

    • Extraction of oil, metals, natural gas have huge negative externalities

    • Market results in too much extraction

  • Government policies

    • Major tax breaks to domestic energy producers

  • Prices may not be sending the right signals

Doomsday scenarios l.jpg

Doomsday scenarios

  • Aka

  • “We are running out of everything and we are all going to die”

Paul ehrlich the population bomb 1968 l.jpg

Paul EhrlichThe Population Bomb, 1968

  • "a major food shortage in the United States in the 1970s. . .hundreds of millions of people are going to starve to death."

  • By 1999 U.S. population would be only 23 million

    (actual 1999 U.S. population = 288 million)

Limits to growth 1974 l.jpg

Limits to Growth1974

World will run out of

  • gold by 1981

  • mercury by 1985

  • tin by 1987

  • zinc by 1990

  • petroleum by 1992, and

  • copper, lead, and natural gas by 1993

An economist s refutation l.jpg

An economist’s refutation:

  • Julian Simon

  • The Ultimate Resource (1983)

  • Hoodwinking the Nation (1999)

  • Doomsayers underestimate human ingenuity

Simon vs ehrlich l.jpg

Simon vs. Ehrlich

  • Made a bet in 1980 for $1000

  • Simon bet price of 5 key metals would be LOWER in 1990

    • Signaling less scarcity

  • Simon won. Ehrlich paid

    • Simon offered to renew the bet, Ehrlich refused

Real concerns about resources today l.jpg

Real concerns about resources today:

  • Has natural gas production peaked

  • Will oil production soon peak?

Hubbert’s curve

Slide37 l.jpg

  • Are we running out of copper?

  • Are we past the tipping point on global warming?


  • Doomsayers need to take some responsibility for lack of world action

  • Login