11 - Capital and Natural Resource Markets

Abstract

Firms regulate their use of inputs depending upon the marginal costs of those productive resources and their marginal revenues. The profit-maximizing firm uses any given resource until its marginal revenue equals marginal cost. Changes in either marginal costs or marginal revenues alter the firm's demand for inputs. The demand for capital is complicated because capital must be purchased, but revenues are earned in the future. Firms must use the tool of present value to compare these costs and revenues. The firm purchases capital to the point where its current marginal cost equals the present value of its future marginal revenues. Most inputs are supplied along the lines of the producer decision. Natural resources supplies might be affected by other economic events. In the case of a finite natural resource, opportunity costs must be considered. This makes the production decision different from that for a good without a finite production limit. Some resource markets experience boom and bust cycles because of the lag between the time when production decisions are made and when the product itself can be brought to market. The cobweb model describes these cycles in markets for agricultural products, natural resources, and specific occupational groups labor markets.