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11. Markets for Capital and Natural Resources

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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  1. 11. Markets for Capital and Natural Resources • Financial markets • Natural Resource markets

  2. Financial Markets • Demand for financial capital • Supply of financial capital • interest rate • financial capital = loanable funds

  3. Demand for Financial capital • firms demand funds to finance capital purchases • higher interest rate, more expensive to borrow • lower Q demanded of funds

  4. interest rate D Q funds

  5. Shifts in demand for funds • population growth • increase demand for goods, • increase demand for capital, • increase demand for funds

  6. technology • increase demand for new capital, • increase demand for funds to finance it

  7. Government borrowing • Federal gov’t deficits shift demand to the right

  8. 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

  9. Shifts in supply of funds • population • higher population, more saving • supply shifts right • income • higher income, more savings • supply shifts right

  10. 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

  11. interest rate S i* D Q funds Q* Financial market equilbrium

  12. Natural Resource markets • renewable resources • land, forests, livestock • nonrenewable resources • fossil fuels, metals

  13. Market for land • supply is fixed for type or location • perfectly inelastic

  14. rent S r* D Q land Q*

  15. 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

  16. rent S economic rent r* D Q land Q*

  17. Pure economic rent • Income earned by resource with a perfectly inelastic supply

  18. Economic Rent • amount of resource earnings ABOVE opportunity cost • or resource earnings – minimum required earnings • “gravy”! “bonus”!

  19. 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

  20. when do resources earn rent? • less elastic (more inelastic) the supply, • more rent as a % of total earnings

  21. Differential rent • Rents earned to superior units of a resource • Where quality of resource affects productivity • Examples • Highly fertile farmland • Highly skilled trial lawyer

  22. Inframarginal rent • Total rent when units of resource differ in their opportunity costs • What causes differences? • Differences in objectives • Differences in constraints

  23. examples • Nursing • Find the work rewarding • Other constraints in the job market • Teaching summer school • Presence of small children • Children in college

  24. P res. S P* D Q res. Q* upward-sloping supply earnings split rent opp. cost

  25. 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

  26. example: metals • nonrenewable resource • discover new sources • use substitutes (plastic) • Recycling technology

  27. 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

  28. If prices rise • People use less (conserve) • People substitute • Firms look for new sources • Firms look for alternatives

  29. 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

  30. Doomsday scenarios • Aka • “We are running out of everything and we are all going to die”

  31. 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)

  32. 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

  33. An economist’s refutation: • Julian Simon • The Ultimate Resource (1983) • Hoodwinking the Nation (1999) • Doomsayers underestimate human ingenuity

  34. 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

  35. Real concerns about resources today: • Has natural gas production peaked • Will oil production soon peak? Hubbert’s curve

  36. 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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