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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.

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11. Markets for Capital and Natural Resources

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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


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Demand for Financial capital

  • firms demand funds to finance capital purchases

  • higher interest rate, more expensive to borrow

    • lower Q demanded of funds


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interest rate

D

Q funds


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Shifts in demand for funds

  • population growth

    • increase demand for goods,

    • increase demand for capital,

    • increase demand for funds


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  • technology

    • increase demand for new capital,

    • increase demand for funds to finance it


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  • Government borrowing

    • Federal gov’t deficits shift demand to the right


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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


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Shifts in supply of funds

  • population

    • higher population, more saving

    • supply shifts right

  • income

    • higher income, more savings

    • supply shifts right


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  • 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

S

i*

D

Q funds

Q*

Financial market equilbrium


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Natural Resource markets

  • renewable resources

    • land, forests, livestock

  • nonrenewable resources

    • fossil fuels, metals


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Market for land

  • supply is fixed for type or location

    • perfectly inelastic


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rent

S

r*

D

Q land

Q*


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


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rent

S

economic rent

r*

D

Q land

Q*


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  • Pure economic rent

    • Income earned by resource with a perfectly inelastic supply


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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


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when do resources earn rent?

  • less elastic (more inelastic) the supply,

    • more rent as a % of total earnings


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Differential rent

  • Rents earned to superior units of a resource

    • Where quality of resource affects productivity

  • Examples

    • Highly fertile farmland

    • Highly skilled trial lawyer


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Inframarginal rent

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

  • What causes differences?

    • Differences in objectives

    • Differences in constraints


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examples

  • Nursing

    • Find the work rewarding

    • Other constraints in the job market

  • Teaching summer school

    • Presence of small children

    • Children in college


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P res.

S

P*

D

Q res.

Q*

upward-sloping supply

earnings split

rent

opp.

cost


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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


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example: metals

  • nonrenewable resource

  • discover new sources

  • use substitutes (plastic)

  • Recycling technology


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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


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  • If prices rise

    • People use less (conserve)

    • People substitute

    • Firms look for new sources

    • Firms look for alternatives


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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


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Doomsday scenarios

  • Aka

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


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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)


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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


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An economist’s refutation:

  • Julian Simon

  • The Ultimate Resource (1983)

  • Hoodwinking the Nation (1999)

  • Doomsayers underestimate human ingenuity


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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


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Real concerns about resources today:

  • Has natural gas production peaked

  • Will oil production soon peak?

Hubbert’s curve


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  • Are we running out of copper?

  • Are we past the tipping point on global warming?

    BUT….

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


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