Markets for Capital and Natural Resources <ul><li>Financial markets </li></ul><ul><li>Natural Resource markets </li></ul>
Financial Markets <ul><li>Demand for financial capital </li></ul><ul><li>Supply of financial capital </li></ul><ul><li>int...
Demand for Financial capital <ul><li>firms demand funds to finance capital purchases </li></ul><ul><li>higher interest rat...
interest rate Q funds D
Shifts in demand for funds <ul><li>population growth </li></ul><ul><ul><li>increase demand for goods, </li></ul></ul><ul><...
<ul><li>technology </li></ul><ul><ul><li>increase demand for new capital, </li></ul></ul><ul><ul><li>increase demand for f...
<ul><li>Government borrowing </li></ul><ul><ul><li>Federal gov’t deficits shift demand to the right </li></ul></ul>
Supply of Financial capital  <ul><li>people’s savings decisions </li></ul><ul><ul><li>tradeoff between consuming today & c...
Shifts in supply of funds <ul><li>population </li></ul><ul><ul><li>higher population, more saving </li></ul></ul><ul><ul><...
<ul><li>expected future income </li></ul><ul><ul><li>save today based on future needs </li></ul></ul><ul><ul><li>-- retire...
Financial market equilbrium interest rate Q funds S D i* Q*
Natural Resource markets <ul><li>renewable resources </li></ul><ul><ul><li>land, forests, livestock </li></ul></ul><ul><li...
Market for land <ul><li>supply is fixed for type or location </li></ul><ul><ul><li>perfectly inelastic </li></ul></ul>
S rent Q land D r* Q*
economic rent <ul><li>rent for land is special </li></ul><ul><ul><li>land is available even if rent=0 </li></ul></ul><ul><...
S rent Q land D r* Q* economic rent
<ul><li>Pure economic rent </li></ul><ul><ul><li>Income earned by resource with a perfectly inelastic supply </li></ul></ul>
Economic Rent <ul><li>amount of resource earnings ABOVE opportunity cost </li></ul><ul><li>or </li></ul><ul><li>resource e...
example:  Shaquille O/Neal <ul><li>2000:  $35 million </li></ul><ul><li>what is minimum for which he would play basketball...
when do resources earn rent? <ul><li>less elastic (more inelastic) the supply, </li></ul><ul><ul><li>more rent as a % of t...
Differential rent <ul><li>Rents earned to superior units of a resource </li></ul><ul><ul><li>Where quality of resource aff...
Inframarginal rent <ul><li>Total rent when units of resource differ in their opportunity costs </li></ul><ul><li>What caus...
examples <ul><li>Nursing </li></ul><ul><ul><li>Find the work rewarding </li></ul></ul><ul><ul><li>Other constraints in the...
upward-sloping supply earnings split rent opp. cost Q res. P res. S D P* Q*
Supply of nonrenewable resource <ul><li>at point in time Q is fixed </li></ul><ul><li>but over time </li></ul><ul><ul><li>...
example: metals <ul><li>nonrenewable resource </li></ul><ul><li>discover new sources </li></ul><ul><li>use substitutes (pl...
Market-guided conservation <ul><li>Markets have built-in incentives for efficient resource use </li></ul><ul><li>If a reso...
<ul><li>If prices rise </li></ul><ul><ul><li>People use less (conserve) </li></ul></ul><ul><ul><li>People substitute </li>...
Problems with markets & nonrenewable resources <ul><li>Externalities </li></ul><ul><ul><li>Extraction of oil, metals, natu...
Doomsday scenarios <ul><li>Aka </li></ul><ul><li>“ We are running out of everything and we are all going to die” </li></ul>
Paul Ehrlich The Population Bomb ,  1968 <ul><li>&quot;a major food shortage in the United States in the 1970s. . .hundred...
Limits to Growth 1974 <ul><li>World will run out of </li></ul><ul><li>gold by 1981 </li></ul><ul><li>mercury by 1985 </li>...
An economist’s refutation: <ul><li>Julian Simon </li></ul><ul><li>The Ultimate Resource  (1983) </li></ul><ul><li>Hoodwink...
Simon vs. Ehrlich <ul><li>Made a bet in 1980 for $1000 </li></ul><ul><li>Simon bet price of 5 key metals would be LOWER in...
 
Real concerns about resources today: <ul><li>Has natural gas production peaked </li></ul><ul><li>Will oil production soon ...
<ul><li>Are we running out of copper? </li></ul><ul><li>Are we past the tipping point on global warming? </li></ul><ul><li...
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Bec doms ppt on markets for capital and natural resources

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Bec doms ppt on markets for capital and natural resources

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Bec doms ppt on markets for capital and natural resources

  1. 1. Markets for Capital and Natural Resources <ul><li>Financial markets </li></ul><ul><li>Natural Resource markets </li></ul>
  2. 2. Financial Markets <ul><li>Demand for financial capital </li></ul><ul><li>Supply of financial capital </li></ul><ul><li>interest rate </li></ul><ul><li>financial capital = loanable funds </li></ul>
  3. 3. Demand for Financial capital <ul><li>firms demand funds to finance capital purchases </li></ul><ul><li>higher interest rate, more expensive to borrow </li></ul><ul><ul><li>lower Q demanded of funds </li></ul></ul>
  4. 4. interest rate Q funds D
  5. 5. Shifts in demand for funds <ul><li>population growth </li></ul><ul><ul><li>increase demand for goods, </li></ul></ul><ul><ul><li>increase demand for capital, </li></ul></ul><ul><ul><li>increase demand for funds </li></ul></ul>
  6. 6. <ul><li>technology </li></ul><ul><ul><li>increase demand for new capital, </li></ul></ul><ul><ul><li>increase demand for funds to finance it </li></ul></ul>
  7. 7. <ul><li>Government borrowing </li></ul><ul><ul><li>Federal gov’t deficits shift demand to the right </li></ul></ul>
  8. 8. Supply of Financial capital <ul><li>people’s savings decisions </li></ul><ul><ul><li>tradeoff between consuming today & consuming tomorrow </li></ul></ul><ul><ul><ul><li>Time preference </li></ul></ul></ul><ul><li>higher interest rates </li></ul><ul><ul><li>encourage saving </li></ul></ul><ul><ul><li>higher opportunity cost of current consumption </li></ul></ul><ul><ul><li>higher Q supplied of funds </li></ul></ul>
  9. 9. Shifts in supply of funds <ul><li>population </li></ul><ul><ul><li>higher population, more saving </li></ul></ul><ul><ul><li>supply shifts right </li></ul></ul><ul><li>income </li></ul><ul><ul><li>higher income, more savings </li></ul></ul><ul><ul><li>supply shifts right </li></ul></ul>
  10. 10. <ul><li>expected future income </li></ul><ul><ul><li>save today based on future needs </li></ul></ul><ul><ul><li>-- retirement, college </li></ul></ul><ul><ul><li>save to smooth consumption over time </li></ul></ul><ul><ul><li>expect income to rise </li></ul></ul><ul><ul><li>-- save less today, supply falls </li></ul></ul><ul><ul><li>expect income to fall </li></ul></ul><ul><ul><li>-- save more today, supply rises </li></ul></ul>
  11. 11. Financial market equilbrium interest rate Q funds S D i* Q*
  12. 12. Natural Resource markets <ul><li>renewable resources </li></ul><ul><ul><li>land, forests, livestock </li></ul></ul><ul><li>nonrenewable resources </li></ul><ul><ul><li>fossil fuels, metals </li></ul></ul>
  13. 13. Market for land <ul><li>supply is fixed for type or location </li></ul><ul><ul><li>perfectly inelastic </li></ul></ul>
  14. 14. S rent Q land D r* Q*
  15. 15. economic rent <ul><li>rent for land is special </li></ul><ul><ul><li>land is available even if rent=0 </li></ul></ul><ul><ul><li>demand affects P, not Q </li></ul></ul><ul><li>economic rent </li></ul><ul><ul><li>rent above what is required to induce Q supplied of factor </li></ul></ul>
  16. 16. S rent Q land D r* Q* economic rent
  17. 17. <ul><li>Pure economic rent </li></ul><ul><ul><li>Income earned by resource with a perfectly inelastic supply </li></ul></ul>
  18. 18. Economic Rent <ul><li>amount of resource earnings ABOVE opportunity cost </li></ul><ul><li>or </li></ul><ul><li>resource earnings – minimum required earnings </li></ul><ul><li>“ gravy”! “bonus”! </li></ul>
  19. 19. example: Shaquille O/Neal <ul><li>2000: $35 million </li></ul><ul><li>what is minimum for which he would play basketball and endorse stuff? </li></ul><ul><ul><li>suppose $1 million </li></ul></ul><ul><li>economic rent: $34 million </li></ul>
  20. 20. when do resources earn rent? <ul><li>less elastic (more inelastic) the supply, </li></ul><ul><ul><li>more rent as a % of total earnings </li></ul></ul>
  21. 21. Differential rent <ul><li>Rents earned to superior units of a resource </li></ul><ul><ul><li>Where quality of resource affects productivity </li></ul></ul><ul><li>Examples </li></ul><ul><ul><li>Highly fertile farmland </li></ul></ul><ul><ul><li>Highly skilled trial lawyer </li></ul></ul>
  22. 22. Inframarginal rent <ul><li>Total rent when units of resource differ in their opportunity costs </li></ul><ul><li>What causes differences? </li></ul><ul><ul><li>Differences in objectives </li></ul></ul><ul><ul><li>Differences in constraints </li></ul></ul>
  23. 23. examples <ul><li>Nursing </li></ul><ul><ul><li>Find the work rewarding </li></ul></ul><ul><ul><li>Other constraints in the job market </li></ul></ul><ul><li>Teaching summer school </li></ul><ul><ul><li>Presence of small children </li></ul></ul><ul><ul><li>Children in college </li></ul></ul>
  24. 24. upward-sloping supply earnings split rent opp. cost Q res. P res. S D P* Q*
  25. 25. Supply of nonrenewable resource <ul><li>at point in time Q is fixed </li></ul><ul><li>but over time </li></ul><ul><ul><li>use </li></ul></ul><ul><ul><li>-- decrease supply </li></ul></ul><ul><ul><li>new discoveries </li></ul></ul><ul><ul><li>-- increase supply </li></ul></ul><ul><ul><li>technology for better use </li></ul></ul><ul><ul><li>-- decrease demand </li></ul></ul>
  26. 26. example: metals <ul><li>nonrenewable resource </li></ul><ul><li>discover new sources </li></ul><ul><li>use substitutes (plastic) </li></ul><ul><li>Recycling technology </li></ul>
  27. 27. Market-guided conservation <ul><li>Markets have built-in incentives for efficient resource use </li></ul><ul><li>If a resource becomes scarce </li></ul><ul><ul><li>Prices rise </li></ul></ul><ul><ul><ul><li>Copper is up 50% in 2006 </li></ul></ul></ul>
  28. 28. <ul><li>If prices rise </li></ul><ul><ul><li>People use less (conserve) </li></ul></ul><ul><ul><li>People substitute </li></ul></ul><ul><ul><li>Firms look for new sources </li></ul></ul><ul><ul><li>Firms look for alternatives </li></ul></ul>
  29. 29. Problems with markets & nonrenewable resources <ul><li>Externalities </li></ul><ul><ul><li>Extraction of oil, metals, natural gas have huge negative externalities </li></ul></ul><ul><ul><li>Market results in too much extraction </li></ul></ul><ul><li>Government policies </li></ul><ul><ul><li>Major tax breaks to domestic energy producers </li></ul></ul><ul><li>Prices may not be sending the right signals </li></ul>
  30. 30. Doomsday scenarios <ul><li>Aka </li></ul><ul><li>“ We are running out of everything and we are all going to die” </li></ul>
  31. 31. Paul Ehrlich The Population Bomb , 1968 <ul><li>&quot;a major food shortage in the United States in the 1970s. . .hundreds of millions of people are going to starve to death.&quot; </li></ul><ul><li>By 1999 U.S. population would be only 23 million </li></ul><ul><li>(actual 1999 U.S. population = 288 million) </li></ul>
  32. 32. Limits to Growth 1974 <ul><li>World will run out of </li></ul><ul><li>gold by 1981 </li></ul><ul><li>mercury by 1985 </li></ul><ul><li>tin by 1987 </li></ul><ul><li>zinc by 1990 </li></ul><ul><li>petroleum by 1992, and </li></ul><ul><li>copper, lead, and natural gas by 1993 </li></ul>
  33. 33. An economist’s refutation: <ul><li>Julian Simon </li></ul><ul><li>The Ultimate Resource (1983) </li></ul><ul><li>Hoodwinking the Nation (1999) </li></ul><ul><li>Doomsayers underestimate human ingenuity </li></ul>
  34. 34. Simon vs. Ehrlich <ul><li>Made a bet in 1980 for $1000 </li></ul><ul><li>Simon bet price of 5 key metals would be LOWER in 1990 </li></ul><ul><ul><li>Signaling less scarcity </li></ul></ul><ul><li>Simon won. Ehrlich paid </li></ul><ul><ul><li>Simon offered to renew the bet, Ehrlich refused </li></ul></ul>
  35. 36. Real concerns about resources today: <ul><li>Has natural gas production peaked </li></ul><ul><li>Will oil production soon peak? </li></ul>Hubbert’s curve
  36. 37. <ul><li>Are we running out of copper? </li></ul><ul><li>Are we past the tipping point on global warming? </li></ul><ul><li>BUT…. </li></ul><ul><li>Doomsayers need to take some responsibility for lack of world action </li></ul>

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