Authors libby rittenberg 714
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The current demand Dfor services of an exhaustible resource is given
by the marginal revenue product (MRP). S1 reflects the current
marginal cost of extracting the resource, the prevailing interest rate,
and expectations of future demand for the resource. The level of
current consumption is thus at Q1. If the interest rate rises, the supply
curve shifts toS2, causing the price of the resource to fall toP2 and the
quantity consumed to rise to Q2. A drop in the interest rate shifts the
supply curve to S3, leading to an increase in price toP3 and a decrease
in consumption to Q3.
The supply of an exhaustible resource such as oil is thus governed by its
current price, its expected future price, and the interest rate. An increase in
the expected future price—or a reduction in the interest rate—reduces the
supply of oil today, preserving more for future use. If owners of oil expect
lower prices in the future, or if the interest rate rises, they will supply
more oil today and conserve less for future use. This relationship is
illustrated in Figure 13.8 "Future Generations and Exhaustible Natural
Resources". The current demand D for these services is given by their
marginal revenue product (MRP). Suppose S1 reflects the current marginal
cost of extracting the resource, the prevailing interest rate, and
expectations of future demand for the resource. If the interest rate
increases, owners will be willing to supply more of the natural resource at
each price, thereby shifting the supply curve to the right to S2. The current
price of the resource will fall. If the interest rate falls, the supply curve for
the resource will shift to the left to S3 as more owners of the resource
decide to leave more of the resource in the earth. As a result, the current
price rises.
Resource Prices Over Time
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org
714
